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2015 (3) TMI 756

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..... ection 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 & 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. (1997 (10) TMI 5 - S .....

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..... period with such distributors. When we consider the definition of `Exclusive Business Right’ in a holistic manner, it transpires that the assessee not only transferred records and benefit of orders and bids to JVC on one hand, but also `to represent itself as carrying on the business as successor to UAL’ (the assessee) and the goodwill earned by it over the period in its distribution network. That appears to be the reason for which Clause B in the preamble part of the Agreement mentions in unambiguous terms about the transfer of ‘the said business and the goodwill’. Similar position follows when we consider Clause 2 of the Agreement with the caption ‘Purchase of Assets’. Sub-clause (1) of this clause categorically mentions that the assessee shall sell: ‘the business as a going concern together with all associated goodwill and the Assets free from all Encumbrances’. In a nutshell, the Agreement amply demonstrates that the assessee not only transferred its ‘Business’ to Daikin, but also the ‘Goodwill’ and the consideration of ₹ 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 .....

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..... l) (FB) (hereinafter also called `the FB judgment ). The Tribunal order (ITA No.1615/Del/2008) dated 30.04.2010, deciding the question of initiation of reassessment in the assessee s favour, has been set aside with a direction to decide the appeal afresh in conformity with the dictum of the FB judgment and on merits as per law. 2. The first ground in the appeal is against the initiation of reassessment proceedings. Briefly stated, the facts of the case are that the original assessment in this case was completed 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 .....

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..... High Court in the case of CIT vs. Kelvinator of India (2002) 174 CTR (Del)(FB) 617 as approved by the Hon ble Supreme Court in CIT vs. Kelvinator of India (2010) 320 ITR 561 (SC), the Tribunal held that the factum of no inquiry having been conducted by the AO during the course of original assessment proceedings on the impugned receipt of ₹ 173 lakh, was not a valid ground to initiate the re-assessment. As such, the assessment order flowing out of such invalid initiation of reassessment was quashed and set aside. 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 .....

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..... n formed the foundation for the initiation of re-assessment proceedings. Having so considered Note no. 10 during the course of original assessment proceedings, the ld. AR argued that considering the same Note again without anything further, for initiating the assessment proceedings, led to change of opinion. Relying on the judgment of the Hon ble Supreme Court in the case of Kelvinator India Ltd. (supra), the ld. AR contended that a change of opinion cannot be allowed for initiating the assessment proceedings. 7.2. We do not approve 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 ass .....

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..... O had applied his mind and examined the subject matter, claim, etc., depends upon the factual matrix of each case and the AO can examine a claim or subject matter even without raising a written query. It observed that there can be cases when an aspect or question is too apparent or obvious to hold that the AO did not examine a particular subject matter, claim, etc. Then in para 39 of the FB judgment, it was explained there may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer 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 .....

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..... w of obvious and apparent , so as to bring it within the scope of deemed examination and the resultant formation of opinion on it. If, now, we accept the assessee s contention that the non-taxability of ₹ 179 lac was too apparent and obvious , it would mean that the situation falls within para 39 of the FB judgment, which, in turn, would mean taking a contrary view from the one that has been canvassed by their Lordships in the FB judgment. We, therefore, refuse to accept the contention advanced by the ld.AR on this issue. II. Objection 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 procee .....

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..... n of law by the audit party is that the internal auditor cannot be allowed to perform functions of judicial supervision over the Income-tax authorities by suggesting to the Assessing Officer about how a provision should be interpreted and whether the interpretation so given by the AO to a particular provision of the Act is right or wrong. An interpretation to a provision given by the internal audit party cannot be construed as a declaration of law binding on the AO. When an internal audit party objects to the interpretation given by the AO to a provision 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 qua .....

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..... e granting of extra depreciation allowance and thus the AO had no jurisdiction under s. 147(b) of the Act to reopen the assessment, was set aside. 8.5. It is discernible from a close look at the above three judgments rendered by the Hon ble Apex Court that where the audit party interprets the provision of law in a manner contrary to what the AO had done, it does not lay down a valid bedrock for the initiation of re-assessment proceedings. If however, the audit party does not offer its own interpretation to the provisions and simply 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 initiat .....

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..... d water cooler which was credited to Capital Reserve Account and was not treated by the assessee as income for the year. 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 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 .....

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..... ment and led to the initiation of reassessment, we hold this report of the internal audit party, formed a valid foundation for the initiation of reassessment proceedings, thereby pushing the case outside the ambit of `change of opinion . 10. In view of the foregoing discussion, we hold that all the objections taken by the ld. AR against the initiation of reassessment are legally unsustainable. These deserve to be and are hereby rejected. Ex consequenti, ground no. 1 challenging the initiation of reassessment proceedings is 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 .....

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..... , which were attributable to earning profits over a course of years because of its reputation, location, distribution network and other features. He affirmed the view of the AO that the assessee transferred `Goodwill and, hence, the amount was rightly charged under the head `Capital gains . The assessee is against the confirmation of this addition. 13. We have heard the rival submissions and perused the relevant material on record. The ld. AR contended that the amount of ₹ 1.73 crore cannot be charged to tax as it is in the 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 thi .....

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..... any other rights whatsoever fall within the definition of capital asset with retrospective effect from 1.4.1962 and resultantly their transfer would attract chargeability under the head Capital gains , subject to the fulfillment of the prescription of the provisions contained in the Chapter IV-E. Section 45, which is a charging provision of this Chapter, provides through sub-section (1) that any profits or gains arising from the transfer of a capital asset, effected in the previous year shall be chargeable to income-tax under this 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 .....

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..... in lieu of a source of income is a capital receipt not chargeable to tax, in our considered opinion, is partly correct. We have noted above that section 55(2) lists certain capital assets which are in the nature of source of income, such as, a right to manufacture, produce or process any article or thing or right to carry on any business. While computing the capital gain on the transfer of such capital assets, their cost of acquisition, unless any purchase price was paid at the time of their acquisition, is to be taken at Nil. The view 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 .....

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..... n the other, which is a joint venture between Daikin Industries Ltd. and Siel Ltd. At this stage, we want to make it clear that SAL which was manufacturing air-conditioners and water coolers to be distributed by the assessee, is a related concern of the assessee. SAL took over the business of manufacturing air conditions and water cooler equipments from SIEL Ltd. on 1.4.1996. These products were sold under the brand name of `Shriram by SIEL Ltd. On 16.10.1996, SAL transferred distribution rights to the assessee under an Agreement, a copy 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, .....

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..... d from dealers; and (iii) the amount of unexpired warranty obligation. Consideration of ₹ 1.73 crore is for the transfer of Exclusive Business Right which has been defined in the definition clause as under:- Exclusive Business Right means that exclusive right of JVC to represent itself as carrying on the Business as successor to UIL including: (a) all records of the Business including records of suppliers and customers; (b) the benefit of the Current Orders; (c) the benefit of all bids and proposals that have 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 balan .....

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..... 22.2. In common parlance and with the assistance from the above material, the term goodwill can be loosely construed as including but not restricted to a reputation or a name which an enterprise makes and enjoys from the cumulative effect of various factors over a period of time, such as, its business dealings with customers and suppliers, its after-sale services, its business set-up, its patents, its trademarks, quality of its products etc. etc. To put it simply, goodwill is a subjective thing reflecting 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 goodw .....

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..... 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. 24. 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 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 an .....

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