2002 (7) TMI 217 - AT - Income Tax

Tribunal reverses CIT(A)'s decision, includes revenue receipts in successor company's total income.

The Tribunal reversed the CIT(A)'s decision and allowed the Revenue's appeal, determining that the amount of Rs. 37,35,432 received by the successor ... Capital receipt or revenue receipt - cash system of accounting - transfer of business as a going concern (lock, stock and barrel) - successor's assessment and Explanation to section 170 - scope of total income - income received or deemed to be receivedCapital receipt or revenue receipt - cash system of accounting - transfer of business as a going concern (lock, stock and barrel) - successor's assessment and Explanation to section 170 - scope of total income - income received or deemed to be received - Whether the amount of Rs. 37,35,432 received by the transferee company in FY 1989-90 (AY 1990-91) is a revenue receipt taxable as income or a capital receipt - HELD THAT: - The Tribunal examined the transfer agreement, the accounting systems of both transferor and transferee (both followed cash system), and the nature of the sums actually received. Clause 7 of the agreement conferred on the successor the legal right to receive trade realisables from sundry debtors. The receipts represented consideration for sale of newspapers and advertisements of earlier periods and were referable to circulating capital/stock-in-trade rather than fixed capital. Under the cash system of accounting, amounts become income when actually received by the assessee; the successor is assessed for income after the date of succession in accordance with its method of accounting. The Explanation to section 170 treats gains accruing from transfer as income for the successor where appropriate. Distinguishing the Madras High Court decision in Indian Overseas Bank on factual grounds (different accounting basis and statutory vesting in that case), the Tribunal held that the received sums were trading receipts and not capital, and hence includible in total income. [Paras 21, 24, 26, 30, 31]The receipt of Rs. 37,35,432 is a revenue receipt and is includible in the total income of the transferee company; the CIT(A)'s deletion is reversed and the Revenue's appeal is allowed.Capital receipt or revenue receipt - cash system of accounting - transfer of business as a going concern (lock, stock and barrel) - successor's assessment and Explanation to section 170 - Whether the amount of Rs. 82,154 received in the relevant year (AY 1991-92) is a part of fixed capital or a revenue receipt - HELD THAT: - Applying the reasoning and conclusions reached in the earlier disposed appeal (AY 1990-91), the Tribunal held that the amount in question is not part of fixed capital but is referable to circulating capital/trading receipts arising from the transferred business and therefore taxable. The same principles regarding cash system of accounting, the successor's right under the transfer agreement, and the Explanation to section 170 govern the decision. [Paras 32, 33, 34]The amount of Rs. 82,154 is not part of fixed capital and is taxable as revenue receipt; the Revenue's appeal is allowed.Final Conclusion: The Tribunal held that amounts received by the transferee company on account of sale of newspapers and advertisements (both the sums in issue for AY 1990-91 and AY 1991-92) are revenue receipts referable to circulating capital and are includible in the transferee's total income; the CIT(A)'s deletions were reversed and the Revenue's appeals allowed. Issues Involved:1. Deletion of addition of Rs. 37,25,432 by CIT(A) based on the Madras High Court's decision.2. Nature of the amount received by the successor company (capital or revenue receipt).3. Application of Section 170 of the Income-tax Act, 1961.Detailed Analysis:1. Deletion of Addition of Rs. 37,25,432 by CIT(A) Based on Madras High Court's Decision:The Revenue appealed against the CIT(A)'s decision to delete the addition of Rs. 37,25,432, arguing that the CIT(A) erred by following the Madras High Court's decision in CIT v. Indian Overseas Bank [1990] 182 ITR 439, which was not applicable to the facts of the case. The CIT(A) had held that the amount received by the successor company was not taxable as it related to the pre-succession period. The Tribunal found that the facts in Indian Overseas Bank were different, as the income in that case was already declared by the erstwhile banks before nationalization, whereas in the present case, the income was not declared by the predecessor firm since it followed the cash system of accounting. The Tribunal concluded that the CIT(A) did not properly appreciate the facts and held that the decision of the Madras High Court was not applicable.2. Nature of the Amount Received by the Successor Company (Capital or Revenue Receipt):The Tribunal examined whether the amount of Rs. 37,35,432 received by the successor company during the financial year 1989-90 was a capital receipt or a revenue receipt. The amount was received on account of sale of newspapers and advertisements in earlier years. The Tribunal held that the receipt was a revenue receipt as it was related to the trading activity of the business. Since both the predecessor firm and the successor company followed the cash system of accounting, the amount received by the successor company was includible in its total income under Section 5 of the Income-tax Act, 1961, as it was received during the relevant assessment year.3. Application of Section 170 of the Income-tax Act, 1961:The Tribunal also considered the applicability of Section 170, which deals with the assessment in case of succession of business. Under Section 170(1)(b), the successor is assessed in respect of the income of the previous year after the date of succession. The Tribunal noted that the successor company was liable to be assessed for the income received after the date of succession (1-4-1989 to 31-3-1990). The Tribunal emphasized that the income received by the successor company from trade debtors on account of sale of newspapers and advertisements was a revenue receipt and not a capital receipt. The Tribunal also referred to the Explanation to Section 170, which includes any gain accruing from the transfer of the business as a result of succession, further supporting the inclusion of the amount in the successor company's total income.Conclusion:The Tribunal reversed the CIT(A)'s order and allowed the Revenue's appeal, holding that the amount of Rs. 37,35,432 was a revenue receipt and includible in the total income of the successor company. The Tribunal also allowed the Revenue's appeal in ITA No. 132(Alld.)/1993 for the assessment year 1991-92, following the same reasoning and holding that the amount of Rs. 82,154 was not a part of fixed capital and was includible in the total income of the successor company.