9911796707
TMI Blog2006 (6) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... of income for the relevant assessment year on 26th Nov., 1997, which was revised on 18th March, 1998. The revised return was taken up for scrutiny by the AO by issuing notice under Section 143(2) and completed the assessment under Section 143(3) of the Act vide order dt. 31st March, 1998. It is seen from the said assessment order that, inter alia, the following issues were discussed: (1) On the issue regarding non-competition fees, the AO has dealt with as under: During the year the assessee has entered into an agreement with Bayer AG Associate Companies on 14th Oct., 1996. Under Clause 3 of the agreement, the company is to transfer its land, factory building plant and machinery to Bayer Indian Syntane Ltd. Accordingly, the assessee has transferred the assets, apart from this the assessee received non-competition fees one time Rs. 14,77,53,000. This amount is not taxable as per the decision of the Madras High Court in CIT v. Late G.D. Naidu reported in 165 ITR 63 (Mad.) (2) The second issue is regarding receipt towards sale of technical know-how and the AO in his order has dealt with the issue as under: Further I have noticed that the assessee has claimed sale of technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nov., 2001 and letter 14th Dec. 2001. The assessee also filed the relevant pages of the report of Comptroller and Auditor General of India for the year ended March, 2000 and March, 2001 issued by the Union Government (Direct Taxes) No. 12/2001 and No. 12 of 2002. 7. After hearing the rival contentions and perusing the case records including documents filed by both the sides, we narrate the facts as under. The relevant assessment year involved is 1997-98 and the assessment was completed under Section 143(3) of the Act vide order dt. 31st March, 1998. Subsequently, a notice under Section 148 was issued dt. 29th Nov., 1999 for reopening of the assessment. The AO has recorded the following reasons for reopening the assessment: Reasons for reopening the assessment: (1) For claiming the deduction under Section 80HHC the assessee has not excluded from interest receipt of Rs. 1,15,95,243, miscellaneous income of Rs. 16,43,874 and rent of Rs. 63,000 from business income. 90 per cent of above receipts have not been reduced from business income for working out 80HHC deduction so claimed higher deduction under Section 80HHC. (2) The assessee has received lump sum sale consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of reasons to judge as to whether there is a nexus between the material before the AO at the time of recording of reasons and reason to believe that income chargeable to tax has escaped assessment. The stand of the assessee is that original assessment was completed under Section 143(3) after the examination of the case in detail and assessment once concluded cannot be disturbed on a mere change of opinion. He further argued that the AO as well as the CIT(A) have held that the law had since been amended w.e.f. 1st April 1989 and in view of the amended law, the AO was entitled to have a relook at the same set of facts although the assessee may not be guilty of non-disclosure of material facts. It was also argued before us that the reopening at the instance of the audit has to be seen from the CAG's report which clearly indicates that they had expressed an opinion of question of law, which was beyond their jurisdiction and so this ground of reopening was open to doubts. 9. On the other hand, the learned Departmental Representative argued that the reopening is within four years and relevant assessment year in the case of the assessee is not hit by the proviso to Section 147 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment from being reopened in order to bring to tax the escaped income. In any case, what needs to be emphasized, is that the obligation is on the assessee to disclose the material facts or the primary facts fully and truly. That is, the assessee is not just expected to disclose but to make a full and true disclosure. A false assertion, or statement, of material fact, therefore, attracts the jurisdiction of the AO under Section 147. This view is supported in the case of Sri Krishna Pvt. Ltd. v. ITO [1996] 221 ITR 538 SC and in the case of Pool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC). In the instant case, it has already been brought out once, in the earlier para, as to how the assessee had almost got away, with the furnishing of inaccurate particulars of income, in respect of claiming wrong depreciation, on an asset which did not exist at all. But for the investigation, assessee would have joyfully got away with his tax evasion, to the extent of a whopping Rs. 300 lakhs, for two assessment years. It will also be pointed out in the subsequent paras, as to how, there is still a case for wrong furnishing of facts by the assessee company, clearly justifying the reopening p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h income has escaped assessment, no action can be initiated by the AO under Section 147. Where however the said period of four years has not expired, then the disclosure of material facts need not be the basis for initiating reassessment proceedings and those can be commenced if the AO has reason to believe that income has escaped assessment, notwithstanding that there was full disclosure of material facts on record. However, the assessee in such cases can defend the initiation of action on the ground that facts were already placed on record and the AO must have or ought to have considered the same. Explanation 1 to Section 147 has a bearing on disclosure aspect and it applies to the assessment under Section 147 to the extent it allows initiation of proceedings under Section 147 on account of non-disclosure of material facts by the assessee. This view has been supported by the decision of the Hon'ble Gujarat High Court in the case of Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT [1999] 236 ITR 832. 16. The basic requirement for initiating reassessment proceedings under Section 147 is that the AO must have reason to believe that income chargeable to tax has escaped ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of mind by the AO to the same set of facts. Then it is a case of mere change of opinion which does not provide jurisdiction to initiate proceedings under Section 147 as operative from 1st April, 1989. 18. In the present case also, after going through the reasons and original assessment order, it is seen that the AO has recorded reasons that the assessee has not excluded interest receipt, miscellaneous income, rent from business income and 90 per cent of the above should have been reduced from business income for working out the deduction under Section 80HHC. Further the disallowance of management fee in the absence of evidence, receipt of non-competing fee treated as capital in nature based on the case law of the Hon'ble jurisdictional High Court in the case of CIT v. Late G.D. Naidu [1987] 165 ITR 63 and receipt towards sale of technical know-how. The AO about these reasons has given only one sentence which reads as under: In view of above facts, I have reason to believe that income chargeable to tax to the tune of crores of rupees has escaped assessment. So the assessment order passed on 31st March, 1998 for asst. yr. 1997.98 is reopened under Section 147 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed by the assessee before the AO were in conformity with the requirements of all applicable laws and known accounting principles, and material details had been exhibited before the AO, it is for the AO to reach such conclusions as he considered was warranted from such data and any failure on his part to do so cannot be regarded as the assessee's failure to furnish the material facts truly and fully. Any lack of comprehension on the part of the AO in understanding the details placed before him cannot confer a jurisdiction for reopening the assessment, long after the period of four years had expired. On the facts of this case, it is clear that the escapement of income, if any, on this account is not on account of any failure on the assessee's part to disclose the material facts fully and truly. The notice issued by the AO in exercise of his power under Section 147, therefore, cannot be sustained. 20. Further, the Hon'ble Delhi High Court (Full Bench) in the case of CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB) has held as under: The Board in exercise of its jurisdiction under the aforementioned provisions had issued the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een received by the AO after the completion of assessment, it may be a sound foundation for exercising the power under Section 147 r/w Section 148 of the Act. We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the AO had received information from an audit report which was not before the ITO, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself. We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the AO to initiate a proceeding under Section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the said Sub-section (3) of Section 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment in consequence of the impugned notice would be in consequence of or to give effect to any findings of the Tribunal in Boudier Christian's case. A direction or finding as contemplated by Section 153(3)(ii) must be a finding necessary for the disposal of a particular case, that is to say, in respect of the particular assessee and in relevance to a particular assessment year. To be a necessary finding it must be directly involved in the disposal of the case. To be a direction as contemplated by Section 153(3) it must be an express direction necessary for the disposal of the case before the authority or Court vide Rajinder Nath v. CIT [1979] 120 ITR 14 (SC); Gupta Traders v. CIT [1982] 135 ITR 504 (All); CIT v. Tarajan Tea Co. (P.) Ltd. [1999] 236 ITR 477 (SC) and CIT v. Goel Bros. [1982] 135 ITR 511 (All); etc. The case of an expatriate employee was to be decided on the basis of the provisions of Article XIV of the treaty, whereas corporate income was to be decided on the basis of either Article III or Article XVI of the treaty or Section 44BB of the Act. Hence, the observations of the Tribunal in Boudier Christian's case was not a direction necessary for the disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to be drawn. It is not for somebody else-far less the assessee--to tell the assessing authority what inferences, whether of fact or of law, should be drawn. Further, the apex Court in this case has held that what is to be remembered is that people often differ as regards what: inferences should be drawn from given facts, then it will be meaningless to demand that the assessee must disclose what inferences, rather the AC) would draw inferences from the primary facts. Even after the insertion of Explanation to Section 147, the position remains that so far as primary facts are concerned, it is assessee's duty to disclose all of them, including particular entries in account books, particular portions of documents as well as documents and other evidences which could have been discovered by the assessing authority from the documents and other evidence disclosed. Here in the present case, as is seen from the original assessment order, the assessee has disclosed all the primary facts which has been discussed in the original assessment order and even the assertion made by the AO in the reassessment order that in respect of claiming depreciation of an asset which did not exist at all, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alcutta Discount Co.'s case as follows: In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee to tell the assessing authority what inferences, whether of facts or law, should be drawn. The law laid down in Calcutta Discount Co.'s case has been restated in several subsequent decisions of this Court: Commissioner of Income-tax v. Hemchandra Kar [1970] 77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at the time of the original assessments, but we do not see what difference production of these two additional documents could have made which contain the same description of the ladies. Neither the letter addressed to the respondent's authorised representatives, M/s S.G. Dastgir and Company, by the ITO on 15th April, 1954, nor the counter-affidavit filed in the High Court explains this point. The documents of 1957 conform to those of 1950 in material particulars; the trust deeds of 1957 only repeat what the deeds of 1950 had disclosed. Non-production of the documents executed in 1957, at the time of original assessments, cannot, therefore, be regarded as non-disclosure of any material fact necessary for the assessment of the respondent for the relevant assessment years. The High Court was right in holding that the ITO had no valid reason to believe that the respondent had omitted or failed to disclose fully and truly all material facts and consequently had no jurisdiction to reopen the assessments for the four years in question. Having second thoughts on the same material does not warrant the initiation of a proceeding under Section 147 of the IT Act, 1961. Mr. Manchanda, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal that the 'question of receipt of sale proceeds in British India was thus bypassed. The assessee's representative had expressly stated that the assessee had maintained a bank account in British India in which 'for recovering from merchants dues in respect of goods delivered at Porbandar' were credited. The assessee also produced the bank pass books. The finding that 'the question of receipt of sale proceeds was bypassed' cannot be accepted as correct. The statement that the cheques were 'subsequently transferred to Porbandar' only means that the amounts realized by encashment of the cheques were sent to Porbandar, and not that the cheques were sent to Porbandar. We do not think that any more detailed disclosure was necessary to comply with the requirements that the assessee had fully and truly disclosed all the material facts necessary for the purpose of assessment. The ITO may, if he is satisfied that on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment, income has escaped assessment, he may assess or reassess the income. But when the primary facts necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued to the assessees beyond the period prescribed under the said provision, held that the assessment orders are vitiated and, therefore, set aside the same. 2.4 Against the said orders of the Tribunal, the Revenue has preferred these appeals on the following substantial questions of law: Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reopening of the assessment under Section 147 of the Act and completion of assessment without issue of notice under Section 143(2) of the Act within 12 months is not valid ? 3. The Punjab & Haryana High Court in Vipan Khanna v. CIT held where no notice under Section 143(2) of the Act had been served on the assessee within the stipulated period and the return as such had become final, in view of the amendment made in Section 147 of the Act w.e.f. 1st April, 1989, the AO could not only assess or reassess the escaped income in respect of which proceedings under Section 147 of the Act have been initiated, but also any other income chargeable to tax which may have escaped assessment and which comes to his knowledge subsequently, in the course of such proceedings. 4. In the instant case, admitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005 in response to a notice served under this section, and (b) subsequently a notice has been served under Sub-section (2) of Section 143 after the expiry of twelve months specified in the proviso to Sub-section (2) of Section 143, as it stood immediately before the amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time-limit for making the assessment, reassessment or re-computation as specified in Sub-section (2) of Section 153, every such notice referred to in this clause shall be deemed to be a valid notice: Provided further that in a case- (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005, in response to a notice served under this section, and (b) subsequently a notice has been served under Clause (ii) of Sub-section (2) of Section 143 after the expiry of twelve months specified in the proviso to Clause (ii) of Sub-section (2) of Section 143, but before the expiry of the time-limit for making the assessment, reassessment or recomputation as specified in Sub-section (2) of Section 153, every such notice referred to in this clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income and the provisions of the Act shall, so far as may be, apply as if the return furnished in response to the notice under the said section were a return required to be furnished under Section 139. It is proposed to insert a proviso to Sub-section (1) so as to provide that where a return has been furnished during the period from 1st Oct., 1991 to 30th Sept., 2005 in response to a notice served under this section and subsequently a notice has been served under Sub-section (2) of Section 143 after the expiry of twelve months specified in the proviso to Sub-section (2) of Section 143 as it stood immediately before the amendment of said sub-section by the Finance Act, 2002, but before the expiry of the time-limit for making the assessment, reassessment or recomputation as specified in Sub-section (2) of Section 153, such notice shall be deemed to be a valid notice. It is also proposed to insert a second proviso in the said sub-section so as to provide that where a return has been furnished during the period from 1st Oct., 1991 to 30th Sept., 2005 in response to a notice served under this section and subsequently a notice has been served under Clause (ii) of Sub-section (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently a notice has been served under Clause (ii) of Sub-section (2) of Section 143, after the expiry of twelve months specified in the proviso to Clause (ii) to Sub-section (2) of Section 143, but before the expiry of the time-limit for making the assessment, reassessment or recomputation as specified in Sub-section (2) of Section 153, such notice shall be deemed to be a valid notice. These amendments will take effect retrospectively from 1st Oct., 1991. It is also proposed to insert an Explanation in Sub-section (1) so as to clarify that the provisions of the newly inserted first proviso or the second proviso shall not apply in relation to any return which has been furnished on or after 1st Oct., 2005 in response to a notice served under Sub-section (1) of Section 148. This amendment will take effect retrospectively from 1st Oct., 2005. 33. From the above provisions, it is clear that if the notice under Section 143(2) is issued after the issuance of notice under Section 148 within the date of completion of reassessment proceedings, that will be deemed to be a valid notice. It is seen from the records and arguments of both the sides that no doubt the Department has issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the view that no notice under Section 143(2) was served on the assessee and the new proviso brought by the Finance Act, 2006 will not come to the help of the Department. Accordingly, the case law of the Hon'ble jurisdictional High Court in the case of CIT v. M. Chellappan (supra) is clearly applicable to the reassessment proceedings initiated in this case. Respectfully following the judgment of the jurisdictional High Court, we allow this issue in favour of the assessee and against the Revenue. ITA No. 102/2003 35. The first issue in the appeal of the Revenue is that the CIT(A) has erred in holding that sum of consideration for sale of technical know-how to a foreign company received in India by the assessee is not liable to tax under Section 9 of the IT Act. 36. We have heard both the sides and gone through the facts on record. The assessee received the consideration in terms of technology transfer agreement between the assessee and Bayer AG, Germany dt. 14th Oct., 1996. In terms of Article 3.1, the assessee transferred its technical know-how in the field of leather chemicals and by Article 6 of the said agreement it was provided that the assessee would not at any ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a new Clause (vi) in Section 9(1) of the IT Act, clearly specifying the circumstances in which the royalty income will be deemed to accrue or arise in India and also defining the term 'royalty'. 38. Now the question arises whether this sum is taxable under the IT Act as capital or revenue receipt. For this, first of all we will go through the provisions of Section 55(2)(a), which reads as under: (2) For the purposes of Sections 48 and 49, "cost of acquisition",- (a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours,- (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and (ii) in any other case not being a case falling under Sub-clauses (i) to (iv) of Sub-section (1) of Section 49, shall be taken to be nil; 39. It is seen that this provision was brought on statute book by the Finance Act, 1987, w.e.f. 1st April, 1988 and the particular provision regarding "or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a capital receipt is not liable to capital gains tax for the relevant assessment year. In this connection, reference may be made to the decision of the Hon'ble Andhra Pradesh High Court in the case of Addl. CIT v. Dr. K.P. Karanth, where the Hon'ble Court has exactly on identical facts dealt with the issue relying on the Supreme Court decision in the case of Travancore Sugars & Chemicals Ltd. v. CIT and Hylam Ltd. v. CIT and decided the issue as under: Sri Rama Rao has relied on some decisions, which are discussed below in support of his contention that the amount of Rs. 50,000 received by the assessee should be taken as income liable to be taxed. In Travancore Sugars & Chemicals Ltd. v. CIT, the facts are that as per the terms of sale transaction with regard to the assets of an undertaking some percentage of annual profit was agreed to be paid by the purchaser in addition to a specified cash consideration. The question that had arisen before the Supreme Court for decision was whether the commission paid on the annual profits was capital expenditure or revenue expenditure. On the ground that the payment was related to the annual profits which flowed from the trading a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt and a revenue receipt. Nothing said in that case also would be of any help to the Revenue here. It will further be seen, the receipt is covered by the investment under Section 54EA of the IT Act of Rs. 15 crores. To the question whether Section 10(3) could be applied to such receipts, the answer is an emphatic "no" because Section 10(3) applies to a casual and non-recurring receipt and it is not the case of the Department that the said receipt was a casual receipt overlooking the fact that it related to transfer of a capital asset as came to be later on under Section 55(2) of the Act and also as held by the apex Court in the case of CIT v. D.P. Sandhu Bros. Chembur (P) Ltd. . The Hon'ble apex Court in this case has further held as under: Furthermore, it would be illogical and against the language of Section 56 to hold that everything that is exempted from capital gains by the statute could be taxed as casual and non-recurring receipt under Section 10(3) r/w Section 56. We are fortified in our view by a similar argument being rejected in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT. 40. In view of these facts and the case law of the Hon'ble Andhra Pradesh H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee replied that one lump sum was fixed and break-up of this is not possible. As per Article 3, there are strict conditions that the assessee cannot start afresh the business of manufacturing, marketing or selling products similar or identical to the transferred business and not to involve directly or indirectly in any business venture which is identical or similar or which is likely to be in competition with the business of manufacturing, marketing or selling products similar or identical to the transferred business. Further there is a clause not to enter in any arrangement with any other person, firm or body corporate for manufacturing, marketing or selling products similar or identical to the transferred business by the persons mentioned in Article 3. Specifically Articles 2 and 4 of the agreement dt. 14th Oct., 1996 took away the right to manufacture, process or market leather chemicals from the assessee, the transfer of intangible assets with restrictive covenants was directly at the fulfilment of the competition clause. The AO took the entire amount of Rs. 14,77,53,000 in respect of transfer of intangible assets as goodwill. It was further held by the AO that this su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Germany and it cannot be said that they were not aware of what goodwill is. In these circumstance the omission of term goodwill speaks volumes about the true nature of agreement. Goodwill forms part of the sale consideration of an undertaking only and only if the transferee intends to continue the acquired business in the same name and style. It is to be noted that the transferee has not used the trade names of the transferor and on the other hand the transferee had used their logo (Bayer Cross) and trade names globally owned by them for several decades, which would go to demonstrate that the intention of the transferee was never to take the goodwill of the transferor but to use their own goodwill known through the world and built over almost 100 years. This was precisely the reason as to why there is no mention of goodwill in the entire agreement. The inclusion of intangibles in the agreement was to enforce the restrictive covenants and so the receipt of Rs. 14,77,53,000 as non-compete fee could never be treated as goodwill. This is supported by the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Late G.D. Naidu by LRs (supra) where it was held as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, we fairly feel that the AO will go into the details of TDS certificates and accordingly decide the issue for levy of interest under Sections 234B and 234C. 47. The next issue is whether the CIT(A) was right in holding that a sum of Rs. 20,12,862 as discount to customers was an ascertained liability and not as provision as held by the AO. 48. We have heard the rival contentions on this issue and perused the records. There is no dispute about the assessee giving discount to the customers for payment as well as quality discount. The commission was also given to the parties through whom orders were procured. This amount was made as a provision for discount and commission payable and all these amounts were paid in the year 1998-99. It is not in dispute that the company was liable to pay sales discount and commission. There is also no dispute about the fact that the sum was a liability incurred wholly and exclusively for the purpose of business as the same has been ascertained during the year in question as a liability accrued and also allowable deduction in the assessment year in view of the fact that the account was mercantile. For disallowance of this liability, the only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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