2015 (3) TMI 756 - AT - Income Tax

Appeal partially allowed: Taxable 'Goodwill' consideration under Income Tax Act; 'Right to carry on business' not taxable

Usha International Ltd. Versus DCIT,

Usha International Ltd. Versus DCIT, - TMI Issues Involved:1. Initiation of reassessment proceedings.2. Objection by the internal audit party.3. Absence of tangible material to justify reassessment.4. Taxability of Rs. 1.73 crore received against the transfer of exclusive distribution rights.Issue-wise Detailed Analysis:I. Initiation of Reassessment Proceedings:The first ground in the appeal concerns the initiation of reassessment proceedings. The original assessment was completed under section 143(3) of the Income Tax Act, 1961, making disallowances on account of bad debts and certain expenses related to exempt dividend income. The Assessing Officer (AO) initiated reassessment proceedings by recording reasons on 30.5.2005, which were based on an audit objection. The Tribunal had initially accepted the assessee's claim about the invalid initiation of reassessment proceedings, citing the absence of fresh material or judgment. However, the Hon'ble Full Bench of the Delhi High Court in CIT vs. Usha International Ltd. held that the AO did not examine the issue during the original assessment, thus there was no change of opinion. The Tribunal was directed to reconsider the matter in light of the Full Bench judgment.II. Objection by the Internal Audit Party:The assessee argued that the initiation of reassessment proceedings based on an audit objection was invalid, citing judgments from the Hon'ble Supreme Court in Indian & Eastern Newspaper Society vs. CIT and CIT vs. Lucas T.V.S. Ltd. However, the Tribunal noted that in CIT vs. PVS Beedis Pvt. Ltd., the Supreme Court upheld reassessment based on factual errors pointed out by the audit party. The Tribunal distinguished between the audit party interpreting the law and merely communicating the existence of a law or factual inaccuracy. In this case, the audit objection was seen as a valid communication of law, thus justifying the reassessment.III. No Tangible Material to Justify Reassessment:The assessee contended that reassessment requires tangible material showing escapement of income, as per the Hon'ble Supreme Court in Kelvinator of India. The Tribunal found that the audit objection, raised after the original assessment, constituted tangible material. This audit objection was considered valid information about the escapement of income, thus meeting the requirement for initiating reassessment proceedings.IV. Taxability of Rs. 1.73 Crore Received Against the Transfer of Exclusive Distribution Rights:The assessee received Rs. 1.73 crore from M/s Daikin Shriram Air-conditioning Pvt. Ltd. for transferring exclusive distribution rights of air conditioners and water coolers, which was credited to the Capital Reserve Account. The AO argued that this amount was chargeable as capital gains. The assessee contended that the distribution rights were self-generated intangible assets with no cost of acquisition, thus not taxable under section 45 of the Act. The Tribunal noted that the term 'Goodwill' includes various elements contributing to a business's reputation and customer connections. The Tribunal found that the assessee transferred both 'Business' and 'Goodwill' to Daikin. The consideration for 'Goodwill' was taxable under section 45(1), while the consideration for the 'Right to carry on business' was not taxable due to the absence of cost of acquisition.The Tribunal concluded that the matter should be remitted to the AO to bifurcate the consideration for 'Goodwill' and the 'Right to carry on business' reasonably. The part of the consideration related to 'Goodwill' would attract tax, while the other part would not, as per the judgment in B.C. Srinivasa Shetty.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to reassess the bifurcation of the consideration received by the assessee. The order was pronounced in the open court on 09.03.2015.