TMI Blog2013 (11) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... ther issues. - ITA No.1077/Mds/2012 - - - Dated:- 7-2-2013 - N S Saini and S S Godara, JJ. For the Appellant : Shri George Cheriyan, Adv. For the Respondent : Dr S Moharana, CIT ORDER:- Per: S S Godara: This assessee s appeal arises from the order of the Commissioner of Income Tax, Chennai -I, Chennai dated 30.03.2012 in C. No. 218(36)CIT-I/263/2011-12 for the assessment year 2007-08 passed under section 263 of the Income Tax Act 1961 [in short the Act ]. 2. Brief facts of the case are that the assessee is a domestic company; engaged in the business of software development. On 29.10.2007, it had filed its e-return , followed by a revised return dated 03.03.2008 and further followed by a re-revised return dated 29/30.01.2009 disclosing income of Rs.1,44,59,015/-. The same was processed under section 143(1) of the Act . 3. In scrutiny proceedings, the Assessing Officer noticed that the assessee had shown an amount of Rs.1,50,51,701/- as bank deposits, whereas its interest income as per TDS certificate was found to be Rs.1,89,40,778/-. In response, the assessee attributed the same to reduction of interest due to deposits closure and penal interest charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sources, as the business of the company has already been transferred on the said date, for the year ended 31-3-2007. The assessee company has shown a sum of Rs.6,97,22,850/ as earn out revenue net of provision for hardware up-gradation charges as income from operations. The other receipts shown in the P L account, are the other revenues of Rs.30,951/-, dividend receipt of Rs. 2,73,871/- and interest receipt of Rs.1,50,51,701/-. Against this, various expenditure namely employee cost of Rs.21,31,874, operating and administrative expense of Rs.4,90,23,987 and also depreciation of Rs.11,66,692/- has been claimed. As can be seen, the other income offered do not fall under the head "Profits and Gains of Business or Profession . 5. Even the income offered from operations as discussed above is 'earn out income' which can only again be classified as "Income from Other Sources for the reasons already elaborated above. Against the earn out income, the assessee has debited a sum of Rs.1.16 crores being hardware up-gradation charges. 6. The earn out income is under the contingent payment payable under Clause 2.1.5 of the Business Transfer Agreement dated 31-3- 2005. The said ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of business which was already transferred as per BTA on 31.3.2005. The assessee had already offered capital gain on the consideration received on transfer of such business. The clauses relating to the income receivable during the earn out period are mainly on account of the, revenue earned by the purchaser of the business. It is also termed as contingent amount. The AO did not examine the actual nature of the receipt and whether such receipts could be regarded as business income, especially when the business was already transferred to another entity. In the above context, the AO was expected to examine the real nature of the agreement between the assessee and purchaser and whether the receipts were earned on the basis of any service or activity carried out by the assessee which can be termed as business. The amount which are received from a discontinued business cannot be treated as business income, unless and otherwise it is established that the assessee had received the same in connection to the business carried on by it. In the above context, the assessment of income under the head 'business' made by the Assessing officer is erroneous. This issue is set aside with direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine the fact before allowing the depreciation. This has rendered the assessment order erroneous. 6.3) Regarding the issue of carry forward and set off of business loss against business income, the assessee stated that claim and allowance of the same in the present assessment year was correct. Further the records show that adjustments had been made in the assessment year 2005-06 and this was not reflected while passing the order for assessment year 2007-08. Accordingly, it is held that the assessment order is erroneous on this issue. 7. Taking all the above facts into account, I am of the view that the assessment order passed is erroneous in so far as it is prejudicial to the interest of revenue. Accordingly, I set Aside the order u/s.143(3) of Income Tax Act, 1961, passed for assessment year 2006-07 on 16/12/2009 and direct the Assessing Officer to examine all the relevant facts and pass a fresh order in accordance with law. Therefore, the assessee is aggrieved and is in appeal before us. 6. In the course of hearing, the AR on behalf of the assessee has submitted that the CIT has wrongly invoked proceedings under section 263 of the Act . It has been further argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay the assessee a sum in the shape of earn out income which was not an amount already determined in the agreement, but contingent upon the yield of the relevant business in the intervening period from 15.06.2005 to 15.06.2006. The parties in the agreement termed the said one year period as earn out period. The said amount payable had to be computed on the basis of revenue generated from the business transferred by the assessee. Not only this, the terms of the agreement also provided that the earn out period receipt stood guaranteed upon irrevocable conditional corporate guarantee. In scrutiny proceedings, we find that the Assessing Officer took note of assessee s receipts qua earn out income of Rs.6,97,22,850/-, but, he never enquired the assessee about the head of the income i.e. whether the income was from business or from any other head as prescribed in the Act . Since it was scrutiny assessment, we find that on 16.07.2009, the Assessing Officer issued a notice to the assessee under section 142(1) of the Act seeking following particulars of the receipt in question: In connection with your Scrutiny Asst. For the Asst. Year 07-08, You are requested to furnish / pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s contention raised as above. So far as the case law cited by the assessee are concerned, after going through the same, we hold that the facts in the same are altogether different. In the case law of Hon ble Bombay High Court (supra), we notice that while passing 263 order, the CIT concerned had not given any finding that the assessment order was erroneous causing prejudice to the interest of the Revenue, which is contrary to the peculiar facts of the case. Coming to other case law of Hon ble Delhi High Court, we notice that the facts are also not similar to the instant appeal. We find that their Lordships in para 19 of the above said judgment duly hold that in case the Assessing Officer does not conduct an enquiry, it itself renders the assessment order erroneous and prejudicial to the interest of the Revenue. We deem it proper to reproduce the relevant para of judgment as under: 19. In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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