ORDER
Mahavir Singh, J.M.
1. This appeal by the Revenue and the cross-objection by the assessee are emanating out of the order of the CIT(A)-III, Chennai, dt. 4th Oct., 2002. The assessment was framed by the AO under Section 143(3) r/w Section 147 of the IT Act, 1961 for the asst. yr. 1997-98.
2. At the outset, the learned Counsel of the assessee made a mention during the course of hearing that the cross-objection of the assessee be taken first for hearing as the jurisdictional issues are raised by the assessee by way of cross-objections. The learned Departmental Representative agreed to this.
Cross-objection 1/2003
3. The first issue in the cross-objection is regarding reopening of the assessment under Section 147 r/w Section 148 of the Act. The briefly stated facts are 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 by LRs .
(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:
Further I have noticed that the assessee has claimed sale of technical know-how on closure of business consideration of Rs. 9,22,60,000 as exemption. I am not agreeing with this claim. The technical know-how is an expenditure but here the assessee received for surrendering technology and know-how on closure of business. Hence it is sold along with plant and machinery and land. Hence it is a capital receipt and long-term capital gains attracts. Therefore, the entire amount of Rs. 9,22,60,000 is added as capital gains. Even after adding this the assessee gets tax benefit under Section 54EA of the Act.
4. Subsequently this assessment was reopened by issuance of notice under Section 148 dt. 29th Nov., 1999. The assessee vide letter dt. 7th Feb., 2000 requested the AO to treat the originally filed return on 10th March, 1998 as return filed in response to this notice. The AO to complete the reassessment proceedings issued a notice under Section 143(2) of the Act dt. 1st Nov., 2001 posting the case for 16th Nov., 2001. Since there was no response to this notice, the AO issued a letter dt. 14th Dec, 2001 where non-compliance of notice under Section 143(2) dt. 1st Nov., 2001 was brought to the notice of the assessee and request was made for appearance on 20th Dec, 2001. In response to these notices, the AO proceeded to frame the assessment and the assessee participated in the reassessment proceedings without prejudice to the right available under law as regards non-receipt of notice under Section 143(2). The assessee contended that after the issuance of notice under Section 148, no notice whatsoever was served on the assessee under Section 143(2) of the Act. The AO proceeded to frame the assessment by making various additions. Aggrieved on this issue, the assessee preferred appeal before the CIT(A). The CIT(A) has confirmed the reopening.
5. Aggrieved, now the assessee is in cross-objections before us. The learned Counsel of the assessee, Shri T. Banusekar, argued on behalf of the assessee and on the other hand, the learned Departmental Representative, Shri Shaji P. Jacob argued.
6. We have heard the rival contentions and perused the case records. We have also gone through the written submissions filed by the assessee as well as the paper book containing pp. 1-94. The learned Departmental Representative filed copies from assessment records of order sheet entry 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 higher deduction under Section 80HHC.
(2) The assessee has received lumpsum sale consideration of tangible and intangible assets of Rs. 19,74,76,000 and treated the same as capital receipt. This amount should be treated as Income chargeable to tax as per Expln. (2) to Clause (vii) of Sub-section (1) of Section 9.
(3) The lump sum consideration of Rs. 9,22,60,000 for transferring, assigning and surrendering technical know-how as income chargeable to tax as per Expln. (2) to Clause (vii) of Sub-section (1) of Section 9. This is treated as capital receipt by the assessee.
(4) The assessee’s claim of Rs. 16,50,000 as management fees on transaction with REPL Mumbai which has been accepted by the assessee as illegal and bogus in the revised return. The claim is not admissible.
(5) The amount received on profit on sale of fixed assets of Rs. 34,23,075 and Rs. 24,00,13,000 on surrender of technical know-how and other tangible/intangible assets have been taken to reserve and surplus in the balance sheet without crediting P&L a/c even though the regular method of accounting is mercantile system and the amount should have been credited to P&L a/c as per their method of accounting. The above sums have not been into account for working out tax liability under Section 115JA.
In view of above facts, I have reason to believe that income chargeable to tax has escaped assessment. So the assessment order passed on 31st March, 1998 for asst. yr. 1997-98 is reopened under Section 147 of the IT Act.
Issue notice under Section 148 of the IT Act.
8. In view of these reasons, the assessment was reopened. The learned Counsel of the assessee has vehemently argued that the notice under Section 148 dt. 29th Nov., 1999 was issued to the assessee on the ground that incorrect exemption was granted in the original assessment which had resulted in escapement of income chargeable to tax. The assessee raised objection regarding validity of reopening of the assessment by letter dt. 2nd June, 2000 on the ground that a validly concluded assessment after proper enquiry cannot be reopened merely on a change of opinion. The AO as well as the CIT(A) rejected the objection. The learned Counsel further argued that the assessment was reopened as can be seen from the recording of reasons contained in the order sheet. In view of the order sheet 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 assesee 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 a1 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 argued that the reopening is within four years and relevant assessment year in the case of the assessee is not hit by the proviso to Section 147 of the Act. He further argued that as per the provisions of the Section 147 Expln. 2(c), where an assessment has been made, but income chargeable to tax has been underassessed; or such income has been assessed at too low a rate; or such income has been made the subject of excessive relief under this Act; or excessive loss or depreciation allowance of any other allowance under this Act has been computed, then the AO car reopen the assessment. He argued that, the relevant assessment year involved is 1997-98 and the assessment year ended on 31st March, 1998 and the reopening was done on 29th Nov., 1999. In view of this, he argued that the reopening is as per the provisions of the Act and accordingly he urged the Bench to confirm the order of the CIT(A) on this issue.
10. It is seen from the reasons recorded reproduced in the above para 7, the reasons are regarding (i) excessive claim of deduction under Section 80HHC on account of interest receipt, miscellaneous income and rent treated as business income, (ii) incorrect allowance of exemption under Section 54 for the lump sum transfer of technology, (iii) incorrect computation of working of the capital gains, (iv) incorrect computation of working of taxability under Section 115JA and (v) computation of receipt as non-compete fee.
Further, in the report of the Comptroller & Auditor General of India for the year ended March, 2001 and March, 2000, Union Government (Direct Taxes) No. 12 of 2002 and No. 12 of 2001, the assessee’s case is mentioned as under:
Fox the year ended March, 2001
Table 3.17 Income escaping assessment
——————————————————————————–
Sl. No. Name of the assessee Assessment Section Nature of mistake Tax effect,
year under which (Rs. In
assessed lakhs)
--------------------------------------------------------------------------------
2. M/s Indian Syntans 1997-98 143(3) The receipts were not 787.82
Ltd. ITN-1V, Chennai) distinguishable between
capital and revenue and
hence entire receipts
should have been
brought to tax and
treated as income.
------------------------------------------------------------------------------
For the year ended March, 2000
--------------------------------------------------------------------------------
Sl. No. Name of the assessee Assessment Section Nature of mistake Tax effect
Year under which (Rs. In
assessed lakhs)
--------------------------------------------------------------------------------
1. M/s Indian Syntans 1997-98 143(3) The incorrect exemption 491.93
Ltd. (TN IV, Chennai) granted for lump sum
transfer of technology
under Section 54EA was
required to be
withdrawn
--------------------------------------------------------------------------------
11. After going through the reports of the CAG and reasons recorded by the AO for reopening the assessment, we have gone through the order of the AO. The AO in her reassessment order at p. 3 has dealt with the issue regarding reopening on change of opinion as under:
In this regard, I wish to point out that the reopening was not based on mere change of opinion. In fact the provisions for reopening in the IT Act provides by way of Explanation under the Section 147 that, the failure on the part of AO to investigate the accounts produced with due diligence will not be considered as full and true disclosure by the assessee. 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 (P) Ltd. v. ITO and in the case of Phool Chand Bajrang Lal and Anr. v. ITO .
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 assessment years. It will also be pointed out in the subsequent paras, as to how, there is still a case for wrong furnishing of facts by the assessee company, clearly justifying the reopening proceedings.
12. Further, the CIT(A) has confirmed the reopening vide para 2.2 as under:
2.2 Appellant’s submissions as contained in the above grounds have been carefully considered. I am unable to agree with the submission made by the appellant in view of the decision in the case of Rakesh Aggarwal v. Asstt. CIT and Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT . Reliance can also be made on the following case laws:
13. It can be seen from the reassessment order passed by the AO that she has discussed that IT Act provided in Section 147 Explanation that the failure on the part of the AO to investigate the accounts produced with due diligence will not be considered as full and true disclosure by the assessee and it is to be understood 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.
14. We have gone through the relevant Expln. 1 to Section 147, which reads as under:
Explanation 1.-Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.
15. It is seen that the AO has invoked Expln. 1 to Section 147. In this Expln. 1 to Section 147, the expression “material facts” and “not necessarily” for which the meaning of these expressions in Taxmann’s Direct Taxes Manual, Vol. Ill is provided as under:
The expression ‘material facts’ in Clause (a) of Section 147 for reopening and ‘concealed the particulars of his income or furnished inaccurate particulars of such income’ in Section 271(1)(c) are different.
The words ‘not necessarily’ as appearing in Expln. 2 only indicate that whether there is a disclosure or not within the meaning of Section 147(a) would depend on the facts and circumstances of each case. To put it differently, it would be the nature of documents and the circumstances in which these are produced before the AO that will determine the question.
It is 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 v. M.J. Makwana, Asstt. CIT .
16. The basic requirement for initiating reassessment proceedings under Section 147 is that the AO must have reason to believe that income chargeable to tax has escaped assessment for that assessment year . Further what is necessary for assuming jurisdiction under Section 147 is that the AO shall record his reasons for issuing notice mandated by Section 148(2) and the same postulates that before the AO is satisfied to act under Section 147, he must put in writing as to why in his opinion or why he holds the belief that income has escaped assessment. Where the AO holds the opinion that because of excessive loss or depreciation allowance the income has escaped assessment, the reasons recorded by the AO must disclose by what process of reasoning he holds such belief that excessive loss or depreciation allowance or any other deduction has been wrongly computed in the original assessment. Merely recording the reason that excessive loss or depreciation allowance or other deduction have been computed without disclosing the reasons by which the AO holds such belief does not confer jurisdiction to take action under Section 147 of the Act. No doubt there is wide scope for taking action under Section 147, but it does not confer jurisdiction on interpretation of a particular provision earlier adopted by the AO. The scope of Section 147 is not for reversing its earlier order suo motu irrespective of there being any material to come to a different conclusion apart from just having second thoughts about the inferences drawn earlier. This view has been supported by the Hon’ble Gujarat High Court in the case of VXL India Ltd. v. Asstt. CIT and Birla VXL Ltd. v. Asstt. CIT .
17. The Hon’ble Delhi High Court in the case of Jindal Photo Films Ltd. v. Dy. CIT held that the fact which could have been discovered by the AO but were not so discovered at the time of original assessment may not constitute a new information. In that view of the matter where the AO has formed the opinion that income has escaped assessment because he has allowed deduction under Section 80-I wrongly and even though in recording the reasons the AO has used the phrase ‘reason to believe’, then in between the date of the original assessment and forming of opinion by the AO to 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 by LRs and receipt towards sale of technical know-how. The AO about these reasons has given only one sentence which reads as under:
In view of above facts, I have reason to believe that income chargeable to tax to the tune of crores of rupees has escaped assessment. So the assessment order passed on 31st March, 1998 for asst. yr. 1997.98 is reopened under Section 147 of the IT Act.
19. Further, the Hon’ble Madras High Court has clearly held in Fenner (India) Ltd. v. Dy CIT after discussing the reasons recorded by the AO, as under:
The first reason set out in the counter-affidavits is that excessive deduction had been allowed under Section 80HHC. The assessee has placed before the AO all statements, a perusal of which clearly shows that all the materials required for calculating the extent of benefits under Section 80HHC and the actual calculation has been placed before the officer. The mistake, If any, is solely due to the mistake made by the officer and is not a mistake that is attributable to any failure on the part of the assessee. This fact is not seriously disputed by the learned Counsel for the Revenue.
The second reason given is that there has been excessive allowance under Section 32AB of the Act, and, therefore some part of the income chargeable to tax has escaped assessment. Here again the detailed working given to the AO, a copy of which has been placed before the Court, shows that the mistake, if any, is a mistake committed by the AO and is not a mistake that is attributable to the assessee’s failure to place fully and truly the material facts.
It is the third and last reason which was sought to be sustained by the learned Counsel for the Revenue as affording sufficient basis for the notice under Section 147. This relates to Modvat adjustment of Rs. 157.83 lakhs towards the excise duty paid by the assessee on the products manufactured by it.
The Court finally held as under:
It is not the case of the Revenue that it is a requirement of any statute, rule or regulation of any known accounting practice that the excise duty paid and set out in the balance sheet or P&L a/c should show the break-up of the Modvat adjustment or that the extent of the credit in the Modvat accrual account should be shown as part of the income or of the profit in the P&L a/c. If the AO was of the view that the amount available in the Modvat accrual amount was required to be treated as part of assessee’s income for the year of account, 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.
20. Further, the Hon’ble Delhi High Court (Full Bench) in the case of CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB) has held as under:
The Board in exercise of its jurisdiction under the aforementioned provisions had issued the circular on 31st Oct., 1989. The said circular admittedly is binding on the Revenue. The authority, therefore, could not have taken a view, which would run counter to the mandate of the said circular. Clause 7.2 as referred to hereinbefore is important.
From a perusal of Clause 7.2 of the said circular it would appear that in no uncertain terms it was stated as to under what circumstances the amendments had been carried out, i.e., only with a view to allay fears that the omission of the expression “reason to believe” from Section 147 would give arbitrary powers to the AO to reopen past assessments on mere change of opinion.
It is, therefore, evident that even according to the CBDT a mere change of opinion cannot form the basis for reopening a completed assessment.
The submission of Mr. Jolly to the effect that the said circular cannot be construed in such a manner whereby the jurisdiction of the statutory authority would be taken away is not apposite for the purpose of this case. In Union of India’s case, AIR SC 849 : (1996) 11 SCC 701, whereupon Mr. Jolly had placed strong reliance, the apex Court was dealing with administrative instructions whereby no right was conferred upon the respondents to have the house rent amount included in their emoluments for the purpose of computing overtime allowance. The apex Court held that otherwise also the Government’s instructions have to be read in conformity with the provisions of the Act. Therein the apex Court was not concerned with the statutory powers of a statutory authority to issue binding circulars.
Another aspect of the matter also cannot be lost sight of. A statute conferring an arbitrary power may be held to be ultra vires Article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favoured.
In the event it is held that by reason of Section 147 if the ITO exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to 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 record by itself may justify the AO to initiate a proceeding under Section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the said Sub-section (3) of Section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.
21. The Hon’ble Supreme Court in the case of CIT v. Foramer France has affirmed the decision of the Hon’ble Allahabad High Court in Foramer v. CIT . The Allahabad High Court has dealt with the law applicable on change of opinion and held that there is no difference between the law prior to substitution and after substitution of Section 147 by Direct Tax Laws (Amendment) Act, 1987. The Hon’ble High Court laid down the principle as under
In our opinion, we have to see the law prevailing on the date of issue of the notice under Section 148 i.e. 20th Nov., 1998. Admittedly, by that date, the new Section 147 has come into force and, hence, in our opinion, it is the new Section 147 which will apply to the facts of the present case. In the present case, there was admittedly no failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment. Hence, the proviso to the new Section 147 squarely applies, and the impugned notices were barred by limitation mentioned in the proviso.
Learned Departmental counsel relied on Section 153(3)(ii) of the IT Act and submitted that there was no bar of limitation in view of the said provision. We do not agree. Section 153 relates to passing of an order of assessment and it does not relate to issuing of notice under Section 147/148. Moreover, this is not a case where reassessment 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 ; Gupta Traders v. CIT (; CIT v. Tarajan Tea Co. (P) Ltd. and CIT v. Goel Brothers , etc. The case of an expatriate employee was to be decided on the basis of the provisions of Article XIV of the treaty, whereas corporate income was to be decided on the basis of either Article III or Article XVI of the treaty or Section 44BB of the Act. Hence, the observations of the Tribunal in Boudier Christian’s case was not a direction necessary for the disposal of the appeal relating to the petitioner. The exigibility of income of the petitioner from manning and management contracts was never an issue directly or indirectly involved in the case of Boudier Christian.
Moreover, the Tribunal in the appeal relating to the assessment of the petitioner’s own case, vide Dy. CIT v. ONGC as agent of Foramer France (2001) 71 TTJ (Del) 570 : (1999) 70 ITD 468 (Del) has considered the decision of the Tribunal in Boudier Christian’s case. It is settled law that an appeal is a continuation of the original proceedings and hence when the Tribunal in the appeal relating to the petitioner has considered the decision of the Tribunal in Boudier Christian’s case, the impugned notice under Section 147/148 would obviously be on the basis of a mere change of opinion by the IT authorities, which would not be valid as held by the Supreme Court in Indian & Eastern Newspaper Society v. CIT ; Gemini Leather Stores v. ITO and Jindal Photo Films Ltd. v. Dy. CIT , etc.
In the decision of the Tribunal in the assessee’s own case, Dy. CIT v. ONGC (supra) it has been held that the income from the contract between the parties was business income and not foe for technical services.
Although we are of the opinion that the law existing on the date of the impugned notice under Section 147/148 has to be seen, yet even in the alternative even if we assume that the law prior to the insertion of the new Section 147 will apply even then it will make no difference since even under the original Section 147 notice for reassessment could not be given on the mere change of opinion as held in numerous cases of the Supreme Court, some of which have been mentioned above. Since the Tribunal in the appeal relating to the assessee company had considered the Tribunal’s earlier decision in Boudier Christian’s case, it will obviously amount to mere change of opinion, and hence the notice under Section 147/148 would be illegal.
22. The Hon’ble apex Court in the case of Calcutta Discount Co. v. ITO 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 assessing authority from the documents and other evidence disclosed. Here in the present case, as is seen from the original assessment order, the assessee has disclosed all the primary facts which has been discussed in the original assessment order and even the assertion made by the AO in the reassessment order that in respect of claiming depreciation of 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 assessment years. It is seen from the original assessment order that the assessee has filed the revised return disallowing the depreciation claimed himself and paid the taxes fully before 31st March, 1998. This cannot be the subject-matter for reopening.
The Hon’ble apex Court in the case of Gemini Leather Stores v. ITO (supra) where the decision of the Calcutta Discount Co. v. ITO (supra) has been followed, has held as under:
It appears that the ITO had written a detailed order in making his best judgment assessment. Having found out all about the drafts which were not mentioned in the assessee’s books of account, the ITO gave the partners of the firm opportunity to explain the drafts. Referring to the statement of one of the partners, Shri Om Prakash, the ITO observed in his order:
He has said that the drafts which were sent by him relating to M/s Gemini Leather Stores were entered in the books of the firm while other drafts which he has made would be of others whose name he does not remember. As he is unable to tell to whom other drafts sent by him relate in spite of specific opportunities given to him, the obvious inference is that moneys of the drafts are that of the firm with which he is connected.
Referring to the circumstances in which these drafts had been sent or received, the ITO further observed:
Since these drafts have been sent or received in such circumstances and by such persons connected with the firm the conclusion is obvious that these drafts relate to the firm.
It is not disputed that the case falls under Clause (a) of Section 147. The question is whether the ITO had reason to believe that income chargeable to tax had escaped assessment for the assessment year in question by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The law on the point has been settled by this Court in Calcutta Discount Co. Ltd. v. ITO . 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 decide what inferences of facts 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 facts or law, should be drawn.
The law laid down in Calcutta Discount Co.’s case has been restated in several subsequent decisions of this Court : CIT v. Hemchandra Kar and Ors. , CIT v. Bhanji Lavji and CIT v. Burlop Dealers Ltd. , to name only a few. In the case before us the assessee did not disclose the transactions evidenced by the drafts which the ITO discovered. After this discovery the ITO had in his possession all the primary facts, and it was for him to make necessary enquiries and draw proper inference as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year. This the ITO did not do. It. was plainly a case of oversight, and it cannot be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The ITO had all the material facts before him when he made the original assessment. He cannot now take recourse to Section 147(a) to remedy the error resulting from his own oversight.”
23. Going by the reasons recorded in the present case, it is seen from the records that the AO has not given any failure on the part of the assessee to disclose the material facts whereas in the original assessment order all the details are discussed and after discussion and following the case laws, allowed the claim of the assessee, whether this tantamounts to change of opinion for reopening. For this, we will go to the case law of the Hon’ble apex Court in the case of ITO v. Nawab Mir Barkat Ali Khan Bahadur , where it was held as under:
The question is whether the existence of the two trust deeds executed by the respondent in 1957 was a material fact necessary for his assessment for the relevant assessment years. The fact that the three ladies and their children have been described in these two documents as wives and children of the respondent would have been material 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 relevant assessment years. The High Court was right in holding that the ITO had no valid reason to believe that the respondent had omitted or failed to disclose fully and truly all material facts and consequently had no jurisdiction to reopen the assessments for the four years in question. Having second thoughts on the same material does not warrant the initiation of a proceeding under Section 147 of the IT Act, 1961.
Mr. Manchanda, the learned Counsel for the appellant, took us through several sections of Mulla’s Principles of Mohamedan Law including Section 268 and submitted that in the circumstances of the case it must be presumed that the three ladies were the legally wedded wives of the respondent. The law has not changed since the original assessments were made and it was open to the ITO to make that presumption at the time. If he should have but did not do so then, he cannot avail of Section 147 to correct that mistake. In any event, we are not called upon in this proceeding to record a finding on the question whether in fact the ladies were the respondent’s legally wedded wives. We are concerned only with the question whether the condition precedent to the exercise of jurisdiction under Section 147 exists in this case; we have found that it does not.
24. The Hon’ble Supreme Court in the case of CIT v. Bhanji Lavji held as under:
In our judgment, the High Court was right in holding that the Tribunal misconceived the nature of the proceedings and the duty imposed upon the assessee by Section 34(1)(a). It is not for the assessee to satisfy the ITO that there was no concealment with regard to any question; it is for the ITO, if that issue is raised, to establish that the assessee had failed to disclose fully and truly certain facts material to the assessment of income which had escaped assessment. Failure to disclose how the delivery of ghee was given at Porbandar was wholly irrelevant, and failure to furnish particulars in that behalf cannot assist the case of the Department. Observation relating to the failure to disclose the price of ghee supplied is not strictly accurate, for it was disclosed by the assessee’s representative that the cheques were delivered for payment of the dues for ghee supplied at Porbandar and that ‘they were subsequently transferred to Porbandar’. It was again no duty of 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 disclosure was necessary to comply with the requirements that the assessee had fully and truly disclosed all the material facts necessary for the purpose of assessment.
The ITO may, if he is satisfied that on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment, income has escaped assessment, he may assess or reassess the income. But when the primary facts necessary for assessment are fully and truly, disclosed, he is not entitled on change of opinion to commence proceedings for reassessment. The ITO was apprised of all the primary facts necessary for assessment, and he proceeded to ‘drop the assessment proceedings’. He may have raised a wrong legal inference from the facts disclosed but on that account he was not competent to commence reassessment proceedings under Section 34(1)(a) for the two asst. yrs. 1947-48 and 1948-49.
25. In view of the above discussion and respectfully following the case laws of the Hon’ble apex Court, the Hon’ble jurisdictional High Court and other High Courts, we fairly feel that the reopening is not permissible on change of opinion as clearly evident from the reasons recorded by the AO and the original assessment order passed by the AO. In view of this, the reopening is held as bad in law. Accordingly, this issue of the cross-objection is decided in favour of the assessee and against the Revenue.
26. The second legal issue raised by the assessee in the cross-objection is that no notice under s 143(2) is served on the assessee within the stipulated period of 12 months from the end of the month in which the return in response to notice under Section 148 was filed. The learned Counsel of the assessee on this point relied on the case law of the jurisdictional High Court in the case of CIT v. M. Chellappan (2005) 198 CTR (Mad) 490, wherein the Hon’ble jurisdictional High Court has decided the issue as under:
2. Brief facts of the case, so far as they are relevant are as under:
The assessee filed returns of income and the same were processed under Section 143(1)(a) of the IT Act (for brevity “the Act”). The assessees derived income from property and share income from firms. Subsequently, the AO issued notices under Section 148 of the Act finding that the assessees claimed excessive deductions under Section 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 been served on the assessee within the stipulated period and the return as such had become final, in view of the amendment made in Section 147 of the Act w.e.f. 1st April, 1989, the AO could not only assess or reassess the escaped income in respect of which proceedings under Section 147 of the Act have been initiated, but also any other income chargeable to tax which may have escaped assessment and which comes to his knowledge subsequently, in the course of such proceedings.
4. In the instant case, admittedly, no notices under Section 143(2) of the Act were served on the assessees within the stipulated period of twelve months and, therefore, the proceedings under Section 143 of the Act come to an end and the matter becomes final. Hence, applying the ratio laid down by the Punjab & Haryana High Court in Vipan Khanna v. CIT (supra), we are of the view that no substantial question of law arises for our consideration in these appeals. Accordingly, these appeals are dismissed. No costs. Consequently, connected T.C.M.P. Nos. 445 to 447 of 2004 are also dismissed.
27. On the other hand, the learned Departmental Representative clearly stated that there is change in law as regards the provisions of Section 148 of the Act by the Finance Act, 2006 with retrospective effect from 1st Oct., 1991 and with that change in law in the provisions of Section 148 of the Act, the requirement of notice is done away. However, the learned Departmental Representative clearly produced the assessment records and stated that notice under Section 143(2) for the relevant assessment year was issued vide notice dt. 1st Nov., 2001, which was served on the assessee on 1st Nov., 2001. The learned Departmental Representative produced the copy of the notice dt. 1st Nov., 2001 issued under Section 143(2) of the Act and there was a further letter from the AO dt. 14th Dec, 2001 wherein the reference to notice under Section 143(2) is mentioned, which reads as under:
With reference to the above, it is observed that there has been no compliance to the notice under Section 143(2) dt. 1st Nov., 2001 requesting you to appear on 16th Nov., 2001.
28. The learned Counsel of the assessee gave a categorical statement at the Bar on the instruction from the assessee that this notice was not served on the assessee. On enquiry from the Bench, the learned Departmental Representative stated that 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 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 Clause (ii) of Sub-section (2) of Section 143 after the expiry of twelve months specified in the proviso to Clause (ii) of 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, every such notice referred to in this clause shall be deemed to be a valid notice.
Explanation.-For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section.
30. It is seen from the Notes on Clauses to the Finance Bill, 2006, that this proviso was inserted to Sub-section (1) so as to provide that where a return has been furnished during the period from 1st Oct., 1991 to 30th September, 1995 in response to a notice served under Section 148 and subsequently a notice has been served under Sub-section (2) of Section 143 after the expiry of twelve months as provided in proviso to Sub-section (2) of Section 143 before the amendment of said sub-section by the Finance Act, 2002, but the said notice is served before the expiry of the time limit for making the assessment, reassessment or recomputation as specified in Sub-section (2) of Section 153 of the Act, such notices shall be deemed to be a valid notice. It is clear from the Explanation brought out by this amendment to clarify that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after 1st October, 2005 in response to a notice served under this section. This means that these provisions will apply during the period from 1st Oct., 1991 to 30th Sept., 2005 and after 30th Sept., 2005, the proviso to Sub-section (2) of Section 143 and the proviso to Clause (ii) of Sub-section (2) of Section 143 will apply as it is.
31. From the reading of above proviso brought out, it clearly means that if notice is issued after twelve months but before the completion of reassessment proceedings, the notice under Section 143(2) is a valid notice. 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 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 recomputation as specified in Sub-section (2) of Section 153, such notice shall be deemed to be a valid notice.
It is also 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 this section 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-section (1) so as to clarify that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after 1st Oct., 2005 in response to a notice served under the said section.
This amendment will take effect retrospectively from 1st Oct., 2005.
32. Further, the memorandum explaining the provisions in the Finance Bill, 2006 for amending Section 148 reads as under:
The time-limit for issue of notice under Sub-section (2) of Section 143 for the purposes of making assessment or reassessment under Section 147.
Under the existing provisions of Sub-section (1) of the Section 148 it has been provided that before making the assessment, reassessment or recomputation under Section 147, the AO shall serve a notice under Section 148, on the assessee, requiring him to furnish the return of his income and the provisions of the Act shall, 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 Section 148 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 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-section (1) so as to clarify that the provisions of the newly inserted first proviso or the second proviso shall not apply in relation to any return which has been furnished on or after 1st Oct., 2005 in response to a notice served under Sub-section (1) of Section 148.
This amendment will take effect retrospectively from 1st Oct., 2005.
33. From the above provisions, it is clear that if the notice under Section 143(2) is issued after the issuance of notice under Section 148 within the date of completion of reassessment proceedings, that will be deemed to be a valid notice. It is seen from the records and arguments of both the sides that no doubt the Department has issued notice under Section 143(2) dt. 1st Nov., 2001 for appearance on 16th Nov., 2001, but nobody turned up on 16th Nov., 2001. The assessee’s contention is that the notice was never served. On enquiry from the Bench, the learned Departmental Representative could not reply whether this notice was served on the assessee or not. From the notice it is seen that it was received by somebody on 1st Nov., 2001, but by whom it is not clear. Even the learned Departmental Representative could not answer this. It is more clear from the letter dt. 14th Dec, 2001 of the AO that there was no compliance to the notice under s 143(2) dt. 1st Nov., 2001 and hence one more opportunity was provided to appear on 20th Dec, 2001. The learned Departmental Representative produced a copy of the order sheet entry dt. 1st Nov., 2001 where it is written as under:
There is no mention that notice under Section 143(2) was served on the assessee or not. On enquiry from the Bench, the learned Counsel of the assessee made a statement at Bar that it is the stand of the assessee from the very beginning that they have not received any notice under Section 143(2). Even the same was agitated in the letter dt. 19th Dec, 2001, which was received by the Department on 19th Dec, 2001 and the relevant text of the letter reads as under:
We have received your letter dt. 14th Dec, 2001 today at 11 a.m.
Without prejudice to our rights available under the law, we wish to submit that notice dt. 1st Nov., 2001 (mentioned in your above letter dt. 14th Dec, 2001) was never received by us and so there has been no failure on our part to comply with any statutory requirement, leave alone the said notice dt. 1st Nov., 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 and against the Revenue.
ITA No. 102/2003
35. The first issue in the appeal of the Revenue is that the CIT(A) has erred in holding that sum of consideration for sale of technical know-how to a foreign company received in India by the assessee is not liable to tax under Section 9 of the IT Act.
36. We have heard both the sides and gone through the facts on record. The assessee received the consideration in terms of technology transfer agreement between the assessee and Bayer AG, Germany dt. 14th Oct., 1996. In terms of Article 3.1, the assessee transferred its technical know-how in the field of leather chemicals and by Article 6 of the said agreement it was provided that the assessee would not at any time directly or indirectly impart the technical know-how transferred to Bayer AG to any other person carrying on similar business. The AO after going through the agreement with Bayer AG and the provisions of Expln. 2 to Section 9(1)(vi) held that transfer of technical know-how partakes the character of goodwill as mentioned in Section 55(2)(a) or the nature of royalty mentioned in Section 9(1)(vi). The AO found that it is a lump sum consideration received for the transfer of technical know-how and this know-how transferred to Bayer AG was in turn transferred by Bayer AG to the joint venture company formed by Bayer AG and the assessee company in India. She found that where all the rights are transferred, it would obviously debar transferee from any future use of the know-how in any manner whatsoever and the contention of the assessee was not accepted that the transfer entails characters of a restrictive covenant. The AO observed that such restriction would automatically arise in the cases where all the rights are transferred. The AO finally was of the opinion that the lump sum consideration received by the assessee is very much income chargeable to tax under section. Explanation 2 to Clause (vi) of Section 9(1) as royalty.
37. The CIT(A) has clearly held that the provisions of Section 9(1)(vi) does refer to the taxpayer who is non-resident and who is chargeable to tax in India in respect of income by way of royalty and this section does not apply to a resident taxpayer and so assessed by the AO. The CIT(A) has discussed the source rule for royalty as per Section 9(1)(vi), which reads as under:
15.1 A non-resident taxpayer is chargeable to tax 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, lumpsum 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 48 and 49, “cost of acquisition”,-
(a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours,-
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
(ii) in any other case not being a case falling under Sub-clauses (i) to (iv) of Sub-section (1) of Section 49, shall be taken to be nil;
39. It is seen that this provision was brought on statute book by the Finance Act, 1987, w.e.f. 1st April, 1988 and the particular provision regarding “or a trade mark or brand name associated with a business” by the Finance Act, 2001, w.e.f. 1st April, 2002, “or a right to manufacture, produce or process any article or thing” was brought by the Finance Act, 1997, w.e.f. 1st April, 1998 and “or right to carry on any business” by the Finance Act, 2002, w.e.f. 1st April, 2003. These clauses are after 1st April, 1998 and the relevant assessment year before us is 1997-98. As is seen from the agreement entered into between Indian Syntans Ltd. and Bayer Indian Systems Ltd., the relevant clauses in Article 2 regarding transferred property reads as under:
Article 2
Transferred Property
The assets to be transferred in accordance with Article 1 of this Agreement shall be
1. all tangible assets such as land, plant, buildings, machinery and equipment facilities regarding the transferred business (details of which shall be set forth on the list and subcontracts attached hereto as Exhibit A); and
2. all intangible assets to be assigned to the transferee (such as distribution and agency agreements, customer and supplier lists, trademarks and trade-names, concessions, licenses, permits, approvals, consents and proprietary rights, etc.) regarding the transferred business (details of which shall be set forth on the list attached hereto as Exhibit B).
Further, as per Article 1, what is transferred is manufacture and process of know-how in terms of Article 1, the assessee shall sell, transfer and assign and surrender to Bayer Indian Syntans all chemicals and intermediaries in its possession or use and it is nothing but a case of 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 & Chemicals Ltd. v. CIT and Hylam Ltd. v. CIT and decided the issue as under:
Sri Rama Rao has relied on some decisions, which are discussed below in support of his contention that the amount of Rs. 50,000 received by the assessee should be taken as income liable to be taxed. In Travancore Sugars & Chemicals Ltd. v. CIT , the facts are that as per the terms of sale transaction with regard to the assets of an undertaking some percentage of annual profit was agreed to be paid by the purchaser in addition to a specified cash consideration. The question that had arisen before the Supreme Court for decision was whether the commission paid on the annual profits was capital expenditure or revenue expenditure. On the ground that the payment was related to the annual profits which flowed from the trading activities of the assessee and had no relation to the capital value of the assets and as the payment was not related to or tied up in any way to any fixed sum agreed between the parties as part of the purchase price, the Supreme Court said that the payment made is in the nature of a revenue expenditure and not a capital expenditure. That case has no application here. For one thing, the question was whether the expenditure was revenue expenditure or capital expenditure. We are not concerned here with the case of an expenditure. Here, it is a case of a receipt. Though the amounts paid in the above case were by way of payment of part of the sale consideration, the Supreme Court came to the conclusion that the expenditure was of a revenue nature, because the payment was related to the annual profits and the payment was not related to or tied up in any way to a fixed sum agreed between the parties as part of the purchase price. We do not think anything said by the Supreme Court, in that case, would be of any help to the Revenue on the facts of the present case.
In Hylam Ltd. v. CIT , which was also decided by this Court, the assessee entered into an agreement with an English company to use some patented process of manufacture. By that agreement, the English company granted to the assessee an exclusive non-assignable licence to manufacture laminates, in accordance with the processes covered by the patents. As a consideration for the grant, the assessee was to pay 5 per cent royalty on the net selling price of all laminated products made and sold in accordance with those patented processes. When the total of the royalty payments reached £ 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-recurring receipt and it is not the case of the Department that the said receipt was a casual receipt overlooking the fact that it related to transfer of a capital asset as came to be later on under Section 55(2) of the Act and also as held by the apex Court in the case of CIT v. D.P. Sandhu Bros. Chembur (P) Ltd. . The Hon’ble apex Court in this case has further held as under:
Furthermore, it would be illogical and against the language of Section 56 to hold that everything that is exempted from capital gains by the statute could be taxed as casual and non-recurring receipt under Section 10(3) r/w Section 56. We are fortified in our view by a similar argument being rejected in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT .
40. In view of these facts and the case law of the Hon’ble Andhra Pradesh High Court, we fairly feel that the receipt of sum relating to surrender of technical know-how being a capital receipt is not liable to capital gain tax for the assessment year in question and even the amendment brought in Section 55(2) by the Finance Act, 1997, w.e.f. 1st April, 1998 is only relevant for and from the asst. yr. 1998-99. In view of this, the assessee succeeds on merits and accordingly this issue of the Revenue is dismissed.
41. The next issue in the Revenue’s appeal is whether the CIT(A) was right in holding that sum received by the assessee towards transfer of intangibles and non-compete fee was not assessable as goodwill.
42. After hearing the rival contentions, we have gone through the agreement Article 3 regarding non-competition fee. The relevant article reads as under:
Article 3
Non-competition
In India and worldwide the transferor hereby agrees and undertakes to completely refrain from manufacturing, marketing and selling products regarding the transferred business and as restrictive covenant the transferor warrants not:
1. to start afresh the business of manufacturing, marketing or selling products similar or identical to the transferred business; and
2. to involve, directly or indirectly, in any business venture which is identical or similar to or which is likely to be in competition with the business of manufacturing, marketing or selling products similar or identical to the transferred business, and
3. to enter in any arrangement with any other person, firm or 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 indirectly in any business venture which is identical or similar or which is likely to be in competition with the business of manufacturing, marketing or selling products similar or identical to the transferred business. Further there is a clause not to enter in any arrangement with any other person, firm or body corporate for manufacturing, marketing or selling products similar or identical to the transferred business by the persons mentioned in Article 3. Specifically Articles 2 and 4 of the agreement dt. 14th Oct., 1996 took away the right to manufacture, process or market leather chemicals from the assessee, the transfer of intangible assets with restrictive covenants was directly at the fulfilment of the competition clause. The AO took the entire amount of Rs. 14,77,53,000 in respect of transfer of intangible assets as goodwill. It was further held by the AO that this sum represents nothing but goodwill and the same was brought to tax as goodwill by taking the cost of acquisition at Nil.
44. It is found from the order of the CIT(A) para 5.20 that there are no material available on record from which it can be held that the intention of the transferee was to run their business in India using the name, fame and reputation of the transferor. The relevant para 5.20 of the CIT(A) where he has given a categorical finding reads as under:
In the facts of the present case there are no’ materials available on record from which it could be held that the intention of the multinational company and its subsidiaries was to run their business in India using the name, fame and reputation of the transferor. The agreement and the available materials, on the other hand point to the fact that the transferee company wanted to monopolize its business in India by eliminating competition and this agreement was designed to serve this purpose.
It is a fact that from the mere reading of the agreement in entirety it would clearly indicate that all the trade names, the names given to various chemicals manufactured, customer lists, supplier list, licenses, permits, approvals, etc. had all been surrendered. Further as an important and integral part of the agreement, restrictive covenants were entered into completely tying the hands of the assessee from entering into competitive business whether as manufacturer, as processor or as marketer. In that process, all intangible 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 acquired business in the same name and style. It is to be noted that the transferee has not used the trade names of the transferor and on the other hand the transferee had used their logo (Bayer Cross) and trade names globally owned by them for several decades, which would go to demonstrate that the intention of the transferee was never to take the goodwill of the transferor but to use their own goodwill known through the world and built over almost 100 years. This was precisely the reason as to why there is no mention of goodwill in the entire agreement. The inclusion of intangibles in the agreement was to enforce the restrictive covenants and so the receipt of Rs. 14,77,53,000 as non-compete fee could never be treated as goodwill. This is supported by the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Late G.D. Naidu by LRs (supra) where it was held as under:
So far as the amount received by the old partners referable to their share in the partnership and the goodwill is concerned, though they are received on capital account as held by the Supreme Court in Malabar Fisheries Co. v. CIT , it is only a distribution of the assets of the partnership among the partners involving no transfer of an asset and, therefore, there could be no question of any capital gains also. The question whether the compensation received for restrictive covenant can be taxed as income or capital is directly covered by the decision in CIT v. Saraswathi Publications . In that case, it was held that a receipt referable to the restrictive covenant was a capital receipt not liable to income-tax. The decision in CIT v. N. Palaniappa Gounder (1982) 31 CTR (Mad) 7 : (1983) 143 ITR 343 (Mad), is an authority for the proposition that the compensation received by the outgoing partners or the old partners in respect of then share in the partnership cannot be taxed as revenue receipts nor can it be said that there was any element of capital gains arising merely because of the valuation of his share on the retirement of the assessee from the firm resulted in an excess over the book value of the net assets of the firm referable to his share. The above two decisions are directly applicable to the facts of this case and we confirm the finding of the Tribunal and accordingly, we answer the first five questions referred to above relating to the recipients in the affirmative 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 ascertained liability and not as provision as held by the AO.
48. We have heard the rival contentions on this issue and perused the records. There is no dispute about the assessee giving discount to the customers for payment as well as quality discount. The commission was also given to the parties through whom orders were procured. This amount was made as a provision for discount and commission payable and all these amounts were paid in the year 1998-99. It is not in dispute that the company was liable to pay sales discount and commission. There is also no dispute about the fact that the sum was a liability incurred wholly and exclusively for the purpose of business as the same has been ascertained during the year in question as a liability accrued and also allowable deduction in the assessment year in view of the fact that the account was mercantile. For disallowance of this liability, the only reason was that the assessee company has not filed the date of payments and mode of payments. It is seen from the order of the CIT(A) that the issue has been remitted back to the file of the AO for examining the details whether the expenditure is admissible deduction in law, the AO has every right to call for and examine such evidences as deemed necessary as per the provisions of the law. The CIT(A) has set aside the issue with categorical directions and hence we need not interfere in the same and accordingly this issue is dismissed as infructuous.
49. The next issue in this appeal is whether the CIT(A) was right in holding that a sum of Rs. 24,00,13,000 and Rs. 34,23,075 taken directly to the capital reserve account in the balance sheet without crediting to the P&L a/c, could not be taken into account for computing the book profit under Section 115JA of the Act. The AO has recomputed the book profit under Section 115JA only on the premise that the amount received towards transfer of technical know-how, tangible and intangible assets has been taken directly to the capital reserve account without crediting the same to the P&L a/c. It is seen that the issue is squarely covered by the decision of the apex Court in the case of Apollo Tyres Ltd. v. CIT it was held that once the P&L a/c is certified by the statutory auditor and approved by the company in its general meeting and thereafter filed before the Registrar of Companies and accepted by the authorities, then the AO has no power to recompute the income under the Companies Act and the AO has only limited powers of making increases and deductions as provided in Explanation to Section 115J. Therefore, we uphold the order of the CIT(A) and this issue raised by the Revenue is dismissed.
50. In the result, the cross-objections of the assessee are allowed on jurisdictional issues, hence the Revenue’s appeals on merits will not survive. Accordingly the cross-objections of the assessee are allowed and the Revenue’s appeal is dismissed.