TaxTMI 
TaxTMI 
2006 (6) TMI 175
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....e that the assessee company filed its return 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: ....
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....ntry as well as reasons for reopening and notice under Section 143(2) dt. 1st 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....
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....t and assessment order dt. 31st March, 1998, it is now settled law that the validity of the reopening has to be decided with reference to recording 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 a....
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....ee. That is, it is to be understood that even if the assessee had produced the books of account and the AO failed to detect the mistake, it will not necessarily debar the assessment 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 asses....
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....a fact that only when the case falls under the proviso to Section 147, the question of non-disclosure of material facts would become relevant and if the assessee has made full disclosure of the material facts, then even if such 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 ....
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....o reopen the assessment, nothing new has happened and then there is no change in law, no new material has come to the fore, no new information has been received and in such circumstances it can be said that there is a fresh application 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 v....
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....unt, the AO should have proceeded to compute the income by taking the same into account. The duty of an assessee is limited to fully and truly disclosing all the material facts. The assessee is not required thereafter to prepare a draft assessment order. If the details 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. ....
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....o be unconstitutional. We are therefore of the opinion that Section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceedings upon his mere change of opinion. We, however, may hasten to add that if "reason to believe" of the AO is founded on an information which might have been 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 re....
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....nt is sought to be made in consequence of or to give effect to any finding or direction contained in the order of the Tribunal in Boudier Christian's case. As already stated above, Boudier Christian's case related to the employees of the company, whereas the impugned notice has been issued to the company. Hence it cannot be said that the proposed reassessment 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); et....
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....ion 147/148 would be illegal. 22. The Hon'ble apex Court in the case of Calcutta Discount Co. v. ITO [1961] 41 ITR 191 has laid down the principle that 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 fact 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 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 asse....
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....acts. The law on the point has been settled by this Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC). The decision in Calcutta Discount Co.'s case is based on Section 34 of the IT Act, 1922, the provisions of which correspond to those of Sections 147 and 148 of the IT Act, 1961; the points of departure from the old law are not material for the purpose of this case. The position is stated in Calcutta 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 deci....
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....aterial if the description were anything new that the ITO happened to discover for the first time. The three trust deeds of 1590 also contained the same description of these ladies and their children and the ITO accepted the statement made by the respondent's financial adviser, Shri C.B. Taraporewala, seeking to explain why the ladies had been described as wives therein. It is true that the trust deeds of 1957 were not produced 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 releva....
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....the assessee to disclose to or instruct the ITO that there were 'profits embedded in the receipt' of the money at Bombay. Sec. 34(l)(a) does not cast any duty upon the assessee to instruct the ITO on question of law. The assessee had disclosed that ghee was delivered at Porbandar by him and the price in respect of those supplied was received in Bombay which was subsequently transferred to Porbandar. We are unable to accept the view of the 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....
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....on 24(1)(vi) of the Act while computing income from property. The AO disallowed the excess claim made by the assessees. 2.2 Aggrieved by the proceedings of the AO, the assessees preferred further appeals before the CIT(A), who confirmed the order of the AO. 2.3 As against the order of the CIT(A), further appeals were preferred by the assessee before the Tribunal, Madras 'B' Bench. The Tribunal, finding that the notices under Section 143(2) of the Act were issued 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 bee....
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.... he is not aware who has received this notice. Whether it is actually served on the assessee or not, but it was the contention of the learned Departmental Representative that it was issued by the IT Department. 29. In this regard, we have gone through the amended provisions of Section 148 and the proviso brought out by the Finance Act, 2006 reads as under: Provided 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 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 fu....
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....ice. Clause 36 of the Finance Bill, 2006 has clearly provided that the amendment will take retrospective effect from 1st Oct., 1991 upto 30th Sept., 2005. Notes on Clauses to Finance Bill, 2006 reads as under: Clause 36 of the Bill seeks to amend Section 148 of the IT Act relating to issue of notice where income has escaped assessment. The existing provisions of Sub-section (1) of the said section provide that before making the assessment, reassessment* or recomputation under Section 147, the AO shall serve a notice on the assessee requiring him to furnish the return of his 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 ....
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.... 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 re-computation as specified in subs. (2) of Section 153, such notice shall be deemed to be a valid notice. It is further 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 Section 148, and, 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) 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-sectio....
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.... 2001. However, we propose to appear on 20th Dec. 2001. But our appearance on 20th Dec. 2001 shall under no circumstances be construed as our admission of having received a notice under Section 143(2). 34. It seems that in this case no notice under Section 143(2) was served on the assessee at all. Once the notice under Section 143(2) was not served on the assessee, the amended proviso to Section 148 will not apply and the amended proviso to Section 148 will apply to the cases where notice under Section 143(2) is served after the expiry of twelve months as specified in the proviso to Sub-section (2) of Section 143 between the period 1st Oct., 1991 to 30th Sept., 2005. In view of these facts, we 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....
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....x in India, in respect of income by way of royalty which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. The IT Act, however, does not contain any definition of the term 'royalty' nor is there any clear-cut source rule specifying the circumstances in which royalty income can be regarded as accruing or arising in India. Further, lump sum payments made for the supply of know-how are not chargeable to tax where such know-how is supplied from abroad and the payment thereof is made outside India, even though the know-how is used in India, if no part thereof is attributable to any services rendered in India. 15.2 The Finance Act, 1976, has inserted 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 4....
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....f transferring, assigning and surrendering the right to manufacture, produce or process any article or thing. When a person surrenders all the technical know-how in his person whether owned or used to a third party, then it is nothing but a case of surrender of income earning apparatus and such receipts will result in closure of business, is nothing but capital in nature. Whether this receipt can be brought to tax under the provisions of Section 9(1)(vi) or under capital gains. The clear answer to this can be found in amendment to Section 55(2) by the Finance Act, 1997, wherein the receipts of the kind referred to above can be brought to tax only from the asst. yr. 1998-99 and not earlier. This appeal relates to asst. yr. 1997-98, the sum relating to surrender and transfer of technical know-how being 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 &....
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....e with those patented processes. When the total of the royalty payments reached GBP 5,000, the assessee was no more liable to pay the royalty. The Supreme Court held that the payments made by the assessee towards royalty were of a capital nature and inadmissible as deductions in the computation of the assessee's business income for the relevant years, on the ground that the acquisition of knowledge in respect of the new product would amount to the acquisition of an advantage or an asset for the extension of the assessee's business. Here also the Court was concerned with a case of an expenditure and not with a case of a receipt. That case also has no parallel to the facts before us. There, the Court was considering the line of demarcation between capital and revenue expenditure and not between a capital 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-....
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....r body corporate for manufacturing, marketing or selling products similar or identical to the transferred business; and 4. by Mr. N. Narayanan, Mrs. M. Narayanan, Mr. K. Narayanan, Ms. M. Narayanan to enter into any employment or to act as consultant for any other person, firm or body corporate other than the transferee engaged in the business of manufacturing, marketing or selling products similar or identical to the transferred business. 43. The AO has taken the view that this payment has to be taken as goodwill and the items which are intangibles go to enter the element of goodwill. This sum was received by the assessee towards non-compete fee for surrender of business and restrictive covenants. The AO asked the assessee to furnish the break-up of the compensation of each intangible assets and certain portion relatable to the non-competition fee. To this, 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 indir....
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....assets associated with the business were surrendered. It is clear from the above facts and records of the case that the agreement did not speak of goodwill and the multinational company, i.e., Bayer AG had no necessity to buy goodwill from the assessee. There is a clear distinction drawn between goodwill and trademarks, know-how, patents, copyrights, licenses, etc. It is therefore concluded that the position in law completely changed from the asst. yr. 1998-99 onwards and that the amendments to Section 55(2) clearly showed that the AO's views were not supported even by the IT Act. The point at issue is whether the payment of Rs. 14,77,53,000 is towards transfer of intangibles or non-compete fees or goodwill. It is to be noted that the agreement pertains to an Indian company and multinational giant. It is further to be noted that agreement was drafted by a battery of lawyers from 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 acqui....
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....tive and in favour of the assessee. 45. Going by the facts of the case and relying on the Hon'ble jurisdictional High Court decision cited supra, we fairly feel that the receipt of non-compete fee is in view of the restrictive covenants as mentioned in Article 3 of the agreement and accordingly this non-compete fee is for not doing the business of similar nature in any manner as prescribed in Article 3 of the agreement. Hence this sum received in lieu of this agreement is neither taxable as income nor capital gain. Accordingly, we confirm the order of the CIT(A) and dismiss this issue of the Revenue. 46. As regards the next issue regarding the credit for TDS, the learned Counsel of the assessee fairly stated that this is a subject-matter for direction to the AO to go into the details and accordingly give appropriate relief for calculation of interest under Sections 234B and 234C. Accordingly, 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 asc....