Usha International Ltd, V. DCIT Circle-18 (1),

ITA 1615/DEL/2008

• Counselvise Citation: 161520114 RSA 2008
• Duration Of Justice: 6 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 23-02-2015
• Assessment Year: 2001-2002
• Appeal Filed On: 30-04-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J P CHANDRARKAR
• Keywords: Capital asset; Business income; Depreciation; Charitable institution; Audit objection; Retrospective amendment; Question of law; Cost of acquisition; Tangible material; Bad and doubtful debts; Difference of opinion; Capital receipt; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 2(14); 80G; 148; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : H : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI I.C. SUDHIR, JM ITA NO.1615/DEL/2008 ASSESSMENT YEAR : 2001-02 USHA INTERNATIONAL LTD., 19, KASTURBA GANDHI MARG, NEW DELHI. PAN: AAACU0032B VS. DCIT, CIRCLE 18(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE DEPARTMENT BY : SHRI J.P. CHANDRARKAR, SR. DR DATE OF HEARING : 03.03.2015 DATE OF PRONOUNCEMENT : .03.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE HAS BEEN REMANDED TO T HE TRIBUNAL FOR A FRESH DECISION BY THE HONBLE DELHI HIGH COURT VIDE ITS JUDGMENT DATED 03.07.2013 (HEREINAFTER ALSO CALLED `THE CONSEQUENT IAL JUDGMENT) ITA NO.1615/DEL/2008 2 PURSUANT TO MAJORITY DECISION IN THE FULL BENCH JUD GMENT RENDERED IN ASSESSEES OWN CASE FOR THIS VERY YEAR SINCE REPORT ED AS CIT VS. USHA INTERNATIONAL LTD. (2012) 348 ITR 485 (DEL) (FB) (HEREINAFTER ALSO CALLED `THE FB JUDGMENT ). THE TRIBUNAL ORDER (ITA NO.1615/DEL/2008) DATED 30.04.2010, DECIDING THE QUESTION OF INITIATION OF REASSESSMENT IN THE ASSESSEES FAVOUR, HAS BEEN SET ASIDE WITH A DIREC TION TO DECIDE THE APPEAL AFRESH IN CONFORMITY WITH THE DICTUM OF THE FB JUDG MENT AND ON MERITS AS PER LAW. 2. THE FIRST GROUND IN THE APPEAL IS AGAINST THE IN ITIATION OF RE- ASSESSMENT PROCEEDINGS. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ORIGINAL ASSESSMENT IN THIS CASE WAS COMPLETED U/S 143(3) OF THE INCOME- TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) O N 30.1.2004 MAKING DISALLOWANCE ON ACCOUNT OF BAD DEBTS AND CERTAIN EX PENSES RELATING TO EXEMPT DIVIDEND INCOME. THEREAFTER, THE AO INITIAT ED REASSESSMENT PROCEEDINGS BY RECORDING THE REASONS ON 30.5.2005, WHICH HAVE BEEN REPRODUCED IN PARA 7 OF THE ORIGINAL TRIBUNAL ORDER , AS UNDER :- IT IS FROM THE NOTES OF ACCOUNTS THAT ASSESSEE HAS RECEIVED A SUM OF RS.173 LAKHS AS CONSIDERATION FOR THE TRANSF ER OF ITA NO.1615/DEL/2008 3 EXCLUSIVE DISTRIBUTION RIGHTS OF AC AND WATER COOLE R. THE AMOUNT WAS CREDITED BY ASSESSEE TO THE CAPITAL RESE RVE A/C AND WAS NOT TREATED AS INCOME FOR THE YEAR. THE AMOUNT WAS CHARGEABLE UNDER THE HEAD CG BEING T /F OF DISTRIBUTION RIGHTS. THE ASSESSING OFFICER WHILE C OMPLETING THE ASSESSMENT HAS ALSO NOT ADDED THE AMOUNT OF CG AND TAXED ACCORDINGLY. IN VIEW OF THE ABOVE, I HAVE REASON TO BELIEVE THAT AMOUNT OF RS.173 LAKHS BEING CG HAS ESCAPED ASSESSMENT. NOTI CE U/S 148 ISSUED. 3. IT IS PERTINENT TO MENTION THAT SUCH REASONS FO R INITIATION OF REASSESSMENT PROCEEDINGS WERE THE RESULT OF AUDIT O BJECTION RAISED BY THE SR. AUDIT OFFICER IN HIS REPORT DATED 10.2.2005, TH E RELEVANT PART OF WHICH IS REPRODUCED HEREUNDER FROM PARA 8 OF THE ORIGINAL TRIBUNAL ORDER:- U/S 45(1) OF THE INCOME TAX ACT, 1961 ANY PROFIT O F GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR, SHALL BE CHARGEABLE TO INCOME TAX UN DER THE HEAD CAPITAL GAINS AND SHALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHICH TRANSFER TOOK PLACE. FU RTHER SEC. 2(14) DEFINES A CAPITAL ASSET AS PROPERTY OF ANY KI ND HELD BY ITA NO.1615/DEL/2008 4 THE ASSESSEE. THIS INCLUDES NOT ONLY TANGIBLE ASSE TS BUT ALSO INTANGIBLE RIGHTS. INCOME TAX ASSESSMENT IN CASE OF ABOVE ASSESSEE FOR THE ASSESSMENT YEAR 2001-02 WAS COMPLETED IN JANUARY, 2 004 AT AN INCOME OF RS.7,02,73,350/- AFTER SCRUTINY. AUDI T SCRUTINY REVEALED THAT AS PER NOTES TO ACCOUNT, THE ASSESSEE RECEIVED A SUM OF RS.173 LAKHS AS CONSIDERATION FOR THE TRANSF ER OF EXCLUSIVE DISTRIBUTION RIGHTS OF AIR CONDITIONER AN D WATER COOLER. THE AMOUNT WAS CREDITED BY THE ASSESSEE TO CAPITAL RESERVE ACCOUNT AND WAS NOT TREATED BY THE ASSESSEE AS INCOME FOR THE YEAR. THIS AMOUNT WAS CHARGEABLE UNDER TH E HEAD CAPITAL GAINS, BEING TRANSFER OF DISTRIBUTION RIGHT S. NON INCLUSION OF THIS AMOUNT IN ASSESSEES TOTAL INCOME HAS RESULTED IN INCOME AMOUNTING TO RS.173 LAKHS ESCAPI NG ASSESSMENT WITH CONSEQUENT SHORT LEVY OF TAX BY RS.39,09,800/- @ 20%+13% SC- BEING TAX ON CAPITAL G AINS). REPLY TO ABOVE AUDIT MEMO MAY PLEASE BE FURNISHED. 4. THE ASSESSEE UNSUCCESSFULLY CHALLENGED THE INITI ATION OF RE- ASSESSMENT PROCEEDINGS BEFORE THE LD. CIT(A). THE TRIBUNAL, VIDE ITS ORIGINAL ORDER, ACCEPTED THE ASSESSEES CLAIM ABOUT INVALID INITIATION OF RE- ASSESSMENT PROCEEDINGS ON THE GROUND THAT THERE WAS NO MENTION OF ANY FRESH MATERIAL OR FRESH JUDGMENT BEHIND THE REASONS RECORDED BY THE AO ITA NO.1615/DEL/2008 5 TO HOLD THAT A SUM OF RS.173 LAC SHOULD HAVE BEEN C HARGED TO TAX AS CAPITAL GAIN. CONSIDERING THE JUDGMENT OF THE HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. KELVINATOR OF INDIA (2002) 174 CTR (DEL)(FB ) 617 AS APPROVED BY THE HONBLE SUPREME COURT IN CIT VS. KELVINATOR OF INDIA (2010) 320 ITR 561 (SC), THE TRIBUNAL HELD THAT THE FACTUM OF NO INQUIRY HAVING BEEN CONDUCTED BY THE AO DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS ON THE IMPUGNED RECEIPT OF RS.173 LAKH, WAS NOT A VALID GROUND TO INITIATE THE RE-ASSESSMENT. AS S UCH, THE ASSESSMENT ORDER FLOWING OUT OF SUCH INVALID INITIATION OF REA SSESSMENT WAS QUASHED AND SET ASIDE. 5. THE REVENUE CHALLENGED THIS DECISION OF THE TR IBUNAL BEFORE THE HONBLE DELHI HIGH COURT. THE HONBLE FULL BENCH I N CIT VS. USHA INTERNATIONAL LTD. (SUPRA), BY A MAJORITY JUDGMENT, OVERTURNED THE TRIBUNAL ORDER RENDERED IN ASSESSEES FAVOUR AND HE LD THAT THE EXPRESSION CHANGE OF OPINION POSTULATES FORMATION OF OPINION AT THE FIRST INSTANCE AND THEN A CHANGE THEREOF. AS THE AO DID NOT ADMIT TEDLY EXAMINE THIS ISSUE DURING THE COURSE OF ORIGINAL ASSESSMENT PROC EEDINGS, THE HONBLE FULL BENCH HELD THAT THERE CANNOT BE A DEEMED FORMA TION OF OPINION. THE ITA NO.1615/DEL/2008 6 HONBLE HIGH COURT VIDE THE CONSEQUENTIAL JUDGMENT, WHILE ANSWERING THE QUESTION OF LAW IN FAVOUR OF THE REVENUE, REMIT TED THE MATTER TO THE TRIBUNAL FOR CONSIDERING THE SUBMISSIONS MADE BY TH E ASSESSEE RELYING ON PARA 39 OF THE FB JUDGMENT AND ALSO GIVING LIBER TY TO THE ASSESSEE TO CHALLENGE THE VALIDITY OF RE-ASSESSMENT PROCEEDINGS OR RE-ASSESSMENT ORDER ON MERITS. BEFORE CLOSING THE JUDGMENT, THEIR LORDSHIPS REJECTED THE ASSESSEES CONTENTION IN PARA 16 OF THE CONSEQUENTI AL JUDGMENT THAT THE FB JUDGMENT OVERRULES THE FULL BENCH JUDGMENT OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF KELVINATOR INDIA (SUPRA) . IT WAS OBSERVED THAT THE MAJORITY OPINION IN ASSESSEES OWN CASE EXPLAIN ED AND ELUCIDATED UPON THE OBSERVATIONS MADE IN THE CASE OF KELVINATOR INDIA LTD. (SUPRA) AND DID NOT OVERRULE THE SAME. THAT IS HOW, THE ASS ESSEE IS BEFORE US CONTESTING THE INITIATION OF RE-ASSESSMENT PROCEEDI NGS. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THREE BROAD OBJECTIONS WERE T AKEN BY THE LD. AR AGAINST THE INITIATION OF REASSESSMENT, VIZ., I) IT IS A CASE OF CHANGE OF OPINION; II) OBJECTION BY THE INTERNAL AUDIT PARTY CANNOT JUSTIFY INITIATION OF REASSESSMENT PROCEEDINGS; AND III) THERE WAS NO TANGIBLE MATERIAL TO ITA NO.1615/DEL/2008 7 JUSTIFY THE INITIATION REASSESSMENT. WE WILL ESPOUS E THESE OBJECTIONS, ONE BY ONE. I. CHANGE OF OPINION 7.1. THE LD. ARS FIRST OBJECTION WAS TO THE EFFEC T THAT HAVING EXAMINED ALL THE RELEVANT ASPECTS OF THE ASSESSMENT DURING T HE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS, THE RECOURSE TO THE REASSES SMENT FOR CHARGING TO TAX THE RECEIPT OF RS.173 LAKH WAS NOTHING BUT A CA SE OF CHANGE OF OPINION. HE PUT FORTH THAT NOTE NO.10 OF SCHEDULE 1 0 TO THE ANNUAL ACCOUNTS, BEING ACCOUNTING POLICIES AND NOTES, CL EARLY DIVULGED THAT THE ASSESSEE RECEIVED A SUM OF RS.173 LACS FROM M/S DAIKIN SHRIRAM AIR CONDITIONING PVT. LTD., AS CONSIDERATION FOR THE TR ANSFER OF EXCLUSIVE DISTRIBUTION RIGHTS OF AIR CONDITIONER AND WATER CO OLER WHICH WAS CREDITED TO THE CAPITAL RESERVE ACCOUNT. HE SUBMITTED THAT NOTE NO. 9, IMMEDIATELY ABOVE NOTE NO.10, WAS SPECIFICALLY CONS IDERED BY THE AO DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDING S. OUR ATTENTION WAS DRAWN TOWARDS A QUESTIONNAIRE ISSUED BY THE AO INQU IRING ABOUT NOTE NO. 9 TO THE SCHEDULE 10. SINCE NOTES ON ACCOUNTS WERE EXAMINED BY THE ITA NO.1615/DEL/2008 8 AO, THE LD. AR ARGUED THAT THE PRESUMPTION SHOULD B E DRAWN THAT THE AO DID TAKE INTO CONSIDERATION THE CONTENTS OF NOTE NO . 10, WHICH LATER ON FORMED THE FOUNDATION FOR THE INITIATION OF RE-ASSE SSMENT PROCEEDINGS. HAVING SO CONSIDERED NOTE NO. 10 DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS, THE LD. AR ARGUED THAT CONS IDERING THE SAME NOTE AGAIN WITHOUT ANYTHING FURTHER, FOR INITIATING THE ASSESSMENT PROCEEDINGS, LED TO CHANGE OF OPINION. RELYING ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF KELVINATOR INDIA LTD. (SUPRA), THE LD. AR CONTENDED THAT A CHANGE OF OPINION CANNOT BE ALLOWED FOR INITIATING THE ASSESSMENT PROCEEDINGS. 7.2. WE DO NOT APPROVE THE ARGUMENTS RAISED ON BEHA LF OF THE ASSESSEE ON THIS ISSUE. THERE IS HARDLY ANY NEED TO ACCENT UATE THAT WHEN THE HONBLE JURISDICTIONAL HIGH COURT HAS ALREADY CONSI DERED AND DECIDED THIS VERY ASPECT OF THE MATTER AGAINST THE ASSESSEE BY HOLDING THAT IT WAS NOT A CASE OF CHANGE OF OPINION, WE, BEING A LOWER COURT IN HIERARCHY, CANNOT PERMIT THE LD. AR TO REARGUE THE SAME THING ONCE AGAIN BEFORE US IN AN ATTEMPT TO PERSUADE US FOR TAKING A DIFFERENT VIEW FROM THE ONE ALREADY TAKEN BY THE HONBLE HIGH COURT. AT THE COS T OF REPETITION, WE ITA NO.1615/DEL/2008 9 MENTION THAT THE ASSESSEE ADMITTED BEFORE THE HONB LE HIGH COURT THAT NO QUERY WAS RAISED BY THE AO IN ORIGINAL ASSESSMENT P ROCEEDINGS ON THIS ISSUE. IT WAS ON THIS BASIS THAT THE HONBLE HIGH COURT RECORDED IN PARA 23 OF ITS FB JUDGMENT THAT IF THE AO DID NOT EXAM INE A PARTICULAR SUBJECT MATTER, ENTRY OR CLAIM/DEDUCTION, IT MUST BE PRESUM ED THAT HE DID NOT FORM ANY OPINION ON THAT. IT FURTHER OBSERVED THAT: TH ERE CANNOT BE DEEMED FORMATION OF OPINION, EVEN WHEN THE PARTICULAR SUBJ ECT MATTER, ENTRY OR CLAIM/DEDUCTION IS NOT EXAMINED. AGAIN, IN PARA 25 OF THE FB JUDGMENT, THEIR LORDSHIPS OBSERVED THAT: THUS, IF A SUBJECT MATTER, ENTRY OR CLAIM/DEDUCTION IS NOT EXAMINED BY AN ASSESSING OFF ICER, IT CANNOT BE PRESUMED THAT HE MUST HAVE EXAMINED THE CLAIM/DEDUC TION OR ENTRY AND, THEREFORE, IT IS THE CASE OF CHANGE OF OPINION. WHEN AT THE FIRST INSTANCE, IN THE ORIGINAL ASSESSMENT PROCEEDINGS, N O OPINION IS FORMED, PRINCIPLE OF CHANGE OF OPINION CANNOT AND DOES NO T APPLY. THE HONBLE HIGH COURT HIGHLIGHTED THE DIFFERENCE BETWE EN CHANGE OF OPINION AND FAILURE OR OMISSION OF THE ASSESSING OFFICER TO FORM AN OPINION ON A SUBJECT MATTER, ENTRY, CLAIM OR DEDUC TION ETC. IT WAS HELD THAT : ` WHEN THE ASSESSING OFFICER FAILS TO EXAMINE A SUBJE CT MATTER, ENTRY, ITA NO.1615/DEL/2008 10 CLAIM OR DEDUCTION, HE FORMS NO OPINION. IT IS A C ASE OF NO OPINION. THAT IS HOW, THE HONBLE JURISDICTIONAL HIGH COURT REJECTED THE ASSESSEES CONTENTION THAT IN THE ABSENCE OF SPECIFIC EXAMINAT ION OF THIS ASPECT, THE AO SHOULD BE DEEMED TO HAVE EXAMINED THE SAME. IN VIEW OF THE FACT THAT THE HONBLE HIGH COURT HAS HELD IN ASSESSEES OWN CASE FOR THE EXTANT YEAR THAT IT WAS A CASE OF NO FORMATION OF O PINION IN THE ORIGINAL ASSESSMENT PROCEEDINGS AND THE INITIATION OF RE-ASS ESSMENT PROCEEDINGS COULD NOT BE HELD AS A CASE OF CHANGE OF OPINION, W E ARE UNABLE TO RE- APPRECIATE THE SIMILAR CONTENTION, WHICH HAS ALREAD Y BEEN CONSIDERED AND REJECTED BY THEIR LORDSHIPS. 7.3. THE NEXT LEG OF THE LD. ARS SUBMISSIONS WAS T HAT THE OBSERVATIONS OF THE HONBLE DELHI HIGH COURT CONTAINED IN PARA 3 9 OF THE FB JUDGMENT ARE APPLICABLE TO HIS CASE AND HENCE THE INITIATION OF REASSESSMENT BE DECLARED AS NULL AND VOID. 7.4. IN THIS REGARD, IT IS RELEVANT TO NOTE THAT T HE HONBLE HIGH COURT IN PARA 27 OF THE FB JUDGMENT HAS OBSERVED THAT ITS O BSERVATIONS IN PARAS 23-26 SHOULD NOT BE READ IN ISOLATION, BUT, BE READ WITH CAVEAT SET OUT IN ITA NO.1615/DEL/2008 11 PARA 39. THAT IS HOW, THEIR LORDSHIPS EXPLAINED IN PARA 27 THAT THE QUESTION WHETHER OR NOT THE AO HAD APPLIED HIS MIND AND EXAMINED THE SUBJECT MATTER, CLAIM, ETC., DEPENDS UPON THE FACTU AL MATRIX OF EACH CASE AND THE AO CAN EXAMINE A CLAIM OR SUBJECT MATTER EV EN WITHOUT RAISING A WRITTEN QUERY. IT OBSERVED THAT THERE CAN BE CASES WHEN AN ASPECT OR QUESTION IS TOO APPARENT OR OBVIOUS TO HOLD THAT TH E AO DID NOT EXAMINE A PARTICULAR SUBJECT MATTER, CLAIM, ETC. THEN IN PAR A 39 OF THE FB JUDGMENT, IT WAS EXPLAINED THERE MAY BE CASES WHERE THE ASSESSING OFFICER DOES NOT AND MAY NOT RAISE ANY WRITTEN QUERY BUT STILL T HE ASSESSING OFFICER MAY IN THE FIRST ROUND/ORIGINAL PROCEEDINGS MAY HAV E EXAMINED THE SUBJECT MATTER, CLAIM ETC., BECAUSE THE ASPECT OR Q UESTION MAY BE TOO APPARENT AND OBVIOUS . IT IS PATENT FROM THE CONTENTS OF PARA 27 IN JUXTAPOSITION TO PARA 39 OF THE FB JUDGMENT THAT TH ESE ARE OBSERVATIONS SET OUT BY THEIR LORDSHIPS TO BE FOLLOWED IN DETERM INING AS TO WHETHER THE AO COULD BE SAID TO HAVE APPLIED HIS MIND TO A PART ICULAR CLAIM EVEN WHEN THERE IS NO DISCUSSION IN THE ASSESSMENT ORDER . SUCH AN EXCEPTION HAS BEEN CARVED OUT IN RESPECT OF ASPECTS OR QUESTI ONS WHICH ARE TOO APPARENT OR OBVIOUS . THE LD. AR CONTENDED THAT POINT IN DISPUTE WAS AN ITA NO.1615/DEL/2008 12 OBVIOUS AND APPARENT CASE OF APPLICATION OF MIND BY THE AO. HE STRESSED THAT FIRSTLY, THE ASSET TRANSFERRED, BEING THE CAR RYING ON BUSINESS, WAS ALBEIT A CAPITAL ASSET, BUT DID NOT HAVE ANY COST O F ACQUISITION AND HENCE NOT LIABLE TO TAX UNDER THE HEAD `CAPITAL GAINS. SECONDLY, IT WAS A CASE OF TRANSFER OF SOURCE OF INCOME AND NOT INCOME ITSELF AND HENCE CONSTITUTED A CAPITAL RECEIPT. IT WAS, ERGO, ARGUED THAT SINCE TH E ISSUE UNDER CONSIDERATION ARISING OUT OF NOTE NO. 10 WAS APPARE NT AND OBVIOUS, THE SAME SHOULD BE TREATED TO HAVE BEEN CONSIDERED AND DECIDED BY THE AO IN THE ASSESSEES FAVOUR IN ORIGINAL PROCEEDINGS WITHO UT RAISING ANY QUERY ON IT. 7.5. WE EXPRESS OUR INABILITY TO ACCEPT THIS CONT ENTION. PARA 39 TALKS OF SUCH ISSUES WHICH ARE TOO APPARENT AND OBVIOUS, M EANING THEREBY, TRIVIAL ISSUES OR PRIMA FACIE ACCEPTABLE POINTS NOT REQUIRING ANY DEEP EXAMINATION. IF, HOWEVER, THERE IS A NEED TO EXAMI NE A PARTICULAR ISSUE WHICH IS NOT PRIMA FACIE ACCEPTABLE, BUT THE AO FAILS TO EXAMINE THE SAME DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND LAT ER DEVELOPMENTS WARRANT ITS EXAMINATION, IT WOULD NOT FALL WITHIN THE DOMAIN OF CHANGE OF OPINION AT THE TIME OF INITIATION OF REASSESSME NT. WHEN WE READ THE FB ITA NO.1615/DEL/2008 13 JUDGMENT IN A HOLISTIC MANNER, THE POSITION WHICH E MERGES IS THAT THE HONBLE HIGH COURT HAS HELD THE NON-EXAMINATION OF THE ISSUE IN QUESTION TO BE A CASE OF `NO FORMATION OF OPINION B Y THE AO IN THE ORIGINAL ASSESSMENT PROCEEDINGS AND NOT A DEEMED FO RMATION OF OPINION IN THE CONTEXT OF PARA 39, MEANING THEREBY, THE ISS UE HAS BEEN HELD TO BE NOT PRIMA FACIE ACCEPTABLE WITHOUT SPECIFIC APPLICATION OF MIND. THAT IS HOW, THE INITIATION OF RE-ASSESSMENT PROCEEDINGS HA S BEEN HELD TO HAVE BEEN RIGHTLY MADE, REJECTING THE ASSESSEES CONTENT ION TO BE A CASE OF A MERE CHANGE OF OPINION. THE OBSERVATIONS MADE IN P ARAS 27 AND 39 ABOUT THE PRESUMPTION OF EXAMINATION BY THE AO IN RESPECT OF AN OBVIOUS AND SELF-EVIDENT MATTER ARE EXCEPTION TO THE ASSESSEES CASE INASMUCH AS THEIR LORDSHIPS HAVE CATEGORICALLY HELD THAT IT WAS NOT A CASE IN WHICH THE AO COULD BE PRESUMED TO HAVE EXAMINED THE SUBJECT MATT ER. ONCE THE HONBLE HIGH COURT HAS CONSIDERED AND HELD IT TO BE NOT A CASE OF DEEMED FORMATION OF OPINION BY THE AO DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS, BEING NOT A TRIVIAL OR AN AXIOMATIC IS SUE, IT IMPLIES THAT THE SAME WAS NOT FOUND TO BE FALLING WITHIN THE PURVIEW OF OBVIOUS AND APPARENT, SO AS TO BRING IT WITHIN THE SCOPE OF D EEMED EXAMINATION AND ITA NO.1615/DEL/2008 14 THE RESULTANT FORMATION OF OPINION ON IT. IF, NOW, WE ACCEPT THE ASSESSEES CONTENTION THAT THE NON-TAXABILITY OF RS.179 LAC WA S TOO APPARENT AND OBVIOUS, IT WOULD MEAN THAT THE SITUATION FALLS WI THIN PARA 39 OF THE FB JUDGMENT, WHICH, IN TURN, WOULD MEAN TAKING A CONTR ARY VIEW FROM THE ONE THAT HAS BEEN CANVASSED BY THEIR LORDSHIPS IN THE FB JUDGMENT. WE, THEREFORE, REFUSE TO ACCEPT THE CONTENTION ADVANCED BY THE LD.AR ON THIS ISSUE. II. OBJECTION BY THE INTERNAL AUDIT PARTY 8.1. THE NEXT ARGUMENT TAKEN BY THE LD. AR WAS THAT THE INITIATION OF RE- ASSESSMENT PROCEEDINGS ON THE STRENGTH OF AUDIT OBJ ECTION COULD NOT BE VALIDATED. HE RELIED ON INDIAN & EASTERN NEWSPAPER SOCIETY VS. CIT (1979) 119 ITR 996 (SC) AND CIT VS. LUCAS T.V.S. LTD. (1998) 249 ITR 306 (SC) TO PUT FORTH THAT INITIATION OF RE-ASSESSMENT PROC EEDINGS ON THE BASIS OF INTERNAL AUDIT REPORT, WAS NOT SUSTAINABLE . WHEN THE ATTENTION OF THE LD. AR WAS DRAWN TOWARDS THE JUDGMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF CIT VS. PVS BEEDIS PVT. LTD. (1999) 237 ITR 13 (SC ) IN WHICH THE INITIATION OF RE-ASSESSMENT PROCEEDING S ON THE BASIS OF AUDIT OBJECTION HAS BEEN HELD TO BE VALID, HE REPLIED THA T IN THAT CASE, THE AUDIT ITA NO.1615/DEL/2008 15 PARTY MERELY POINTED OUT A FACT WHICH WAS OVERLOOKE D BY THE AO IN THE ASSESSMENT. THE LD. AR SUBMITTED THAT IT WAS IN TH E BACKDROP OF SUCH FACTS THAT THE HONBLE SUPREME COURT UPHELD THE INI TIATION OF RE- ASSESSMENT PROCEEDINGS. 8.2. IN VIEW OF THE ABOVE JUDGMENTS OF THE HONBL E SUMMIT COURT ON THE POINT, WE NEED TO EXAMINE AS TO WHETHER THE ASSESSE ES CASE FALLS WITHIN THE RATIO LAID DOWN IN PVS BEEDIS PVT. LTD . (SUPRA) OR IN INDIAN AND EASTERN NEWSPAPERS SOCIETY AND LUCAS TVS LTD. (SUPRA) 8.3. IN THE CASE OF INDIAN AND EASTERN NEWSPAPERS SOCIETY (SUPRA), THE ASSESSEE RECEIVED SOME AMOUNT ON ACCOUNT OF OCCUPAT ION OF ITS CONFERENCE HALL AND ROOMS WHICH WAS ASSESSED BY THE AO AS BUSINESS INCOME. THE AUDIT PARTY OF THE DEPARTMENT FORMED AN OPINION THAT THE AMOUNT SHOULD HAVE BEEN TAXED UNDER THE HEAD INCOM E FROM HOUSE PROPERTY. IT WAS IN THAT BACKGROUND OF THE FACTS T HAT THE HONBLE SUPREME COURT HELD THAT THE OPINION OF THE INTERNAL AUDIT P ARTY ON A POINT OF LAW COULD NOT BE A GROUND FOR INITIATION OF RE-ASSESSME NT PROCEEDINGS. SIMILAR IS THE POSITION IN THE CASE OF LUCAS TVS LTD. (SUPRA ). IN THAT CASE, THE ITA NO.1615/DEL/2008 16 ORIGINAL ASSESSMENT WAS COMPLETED BY ALLOWING DEDUC TION FOR A SUM OF RS.6,37,003/- U/S 37(2) OF THE ACT. THE AUDIT PART Y POINTED OUT THAT ONLY A SUM OF RS.2,95,131/- WAS INCURRED DURING THE YEAR A ND THE BALANCE AMOUNT RELATED TO EARLIER YEARS AND HENCE COULD NOT BE ALLOWED. THE AO IN THE ASSESSMENT MADE U/S 147, RESTRICTED THE CLAI M OF DEDUCTION TO RS.2,95,135/-. IT IS ON THE BASIS OF SUCH FACTS TH AT THE HONBLE SUPREME COURT HELD THAT THE OPINION OF THE AUDIT PARTY ON A QUESTION OF LAW, COULD NOT CONSTITUTE AN INFORMATION JUSTIFYING THE INITIA TION OF RE-ASSESSMENT PROCEEDINGS. IN THE CASE OF PVS BEEDIS PVT. LTD. (SUPRA) , THE ORIGINAL ASSESSMENT WAS COMPLETED ALLOWING DEDUCTION U/S 80G . THE AUDIT PARTY OBSERVED THAT THE PAYMENT MADE TO THE TRUST, FOR WH ICH DEDUCTION WAS ALLOWED, WAS NOT A RECOGNIZED CHARITABLE TRUST AS I TS RECOGNITION HAD EXPIRED AND, HENCE, NO DEDUCTION SHOULD BE ALLOWED U/S 80G. THE HONBLE APEX COURT UPHELD THE INITIATION OF RE-ASSE SSMENT PROCEEDINGS ON THE BASIS OF FACTUAL ERROR POINTED OUT BY INTERN AL AUDIT PARTY. 8.4. THE LOGIC IN NOT SUSTAINING THE INITIATION O F REASSESSMENT ON THE BASIS OF INTERPRETATION OF LAW BY THE AUDIT PARTY I S THAT THE INTERNAL AUDITOR CANNOT BE ALLOWED TO PERFORM FUNCTIONS OF JUDICIAL SUPERVISION OVER THE ITA NO.1615/DEL/2008 17 INCOME-TAX AUTHORITIES BY SUGGESTING TO THE ASSESSI NG OFFICER ABOUT HOW A PROVISION SHOULD BE INTERPRETED AND WHETHER THE I NTERPRETATION SO GIVEN BY THE AO TO A PARTICULAR PROVISION OF THE ACT IS R IGHT OR WRONG. AN INTERPRETATION TO A PROVISION GIVEN BY THE INTERNAL AUDIT PARTY CANNOT BE CONSTRUED AS A DECLARATION OF LAW BINDING ON THE AO . WHEN AN INTERNAL AUDIT PARTY OBJECTS TO THE INTERPRETATION GIVEN BY THE AO TO A PROVISION AND PROPOSES SUBSTITUTION OF SUCH INTERPRETATION WI TH THE ONE IT FEELS RIGHT, IT CROSSES ITS JURISDICTION AND ENTERS INTO THE REA LM OF JUDICIAL SUPERVISION, WHICH IT IS NOT AUTHORIZED TO DO. IN SUCH CIRCUMSTA NCES, THE INITIATION OF REASSESSMENT BASED ON THE SUBSTITUTED INTERPRETATIO N OF A PROVISION BY THE INTERNAL AUDIT PARTY, CANNOT BE SUSTAINED. IT HAS BEEN CATEGORICALLY HELD BY THE HONBLE SUPREME COURT IN INDIAN & EASTERN NEWSPAPER SOCIETY (SUPRA) THAT THE INTERNAL AUDIT PARTY OF THE IT DEPARTMENT PERFORMS ESSENTIALLY ADMINISTRATIVE OR EXECUTIVE FUNCTIONS A ND CANNOT BE ATTRIBUTED THE POWERS OF JUDICIAL SUPERVISION OVER THE QUASI-J UDICIAL ACTS OF IT AUTHORITIES. THE IT ACT DOES NOT CONTEMPLATE SUCH P OWER IN ANY INTERNAL AUDIT ORGANISATION OF THE IT DEPARTMENT .... THE ST ATUTE SUPPORTS THE CONCLUSION THAT AN AUDIT PARTY CANT PRONOUNCE ON THE LAW, AND THAT SUCH ITA NO.1615/DEL/2008 18 PRONOUNCEMENT DOES NOT AMOUNT TO 'INFORMATION' WITH IN THE MEANING OF S. 147(B) OF THE IT ACT, 1961. HAVING MADE THE AB OVE OBSERVATIONS IN PARA 6 OF ITS JUDGMENT, THE HONBLE SUMMIT COURT M ADE AN EXCEPTION IN THE SAME PARA TO THE EFFECT THAT : `BUT ALTHOUGH AN AUDIT PARTY DOES NOT POSSESS THE POWER TO SO PRONOUNCE ON THE LAW, IT NE VERTHELESS MAY DRAW THE ATTENTION OF THE ITO TO IT. LAW IS ONE THING, A ND ITS COMMUNICATION ANOTHER. IF THE DISTINCTION BETWEEN THE SOURCE OF T HE LAW AND THE COMMUNICATOR OF THE LAW IS CAREFULLY MAINTAINED, TH E CONFUSION WHICH OFTEN RESULTS IN APPLYING S. 147(B) MAY BE AVOIDED. WHILE THE LAW MAY BE ENACTED OR LAID DOWN ONLY BY A PERSON OR BODY WITH AUTHORITY IN THAT BEHALF, THE KNOWLEDGE OR AWARENESS OF THE LAW MAY B E COMMUNICATED BY ANYONE. NO AUTHORITY IS REQUIRED FOR THE PURPOSE. WHEN WE READ THE JUDGMENT IN INDIAN & EASTERN NEWSPAPER SOCIETY (SUPRA) IN ENTIRETY, WHAT UNFOLDS IS THAT THOUGH THE AUDIT PARTY IS NOT ENTITLED TO JUDICIALLY INTERPRET A PROVISION, BUT AT THE SAME TIME, IT CAN COMMUNICATE THE LAW TO THE AO, WHICH HE OMITTED TO CONSIDER. THIS POSITIO N HAS BEEN APTLY EXPLAINED IN CIT VS. FIRST LEASING CO. OF INDIA LTD. (2000) 241 ITR 248 (MAD) BY HOLDING THAT : `THE SUPREME COURT IN INDIAN AN D EASTERN ITA NO.1615/DEL/2008 19 NEWSPAPER SOCIETY VS. CIT (SUPRA), HAS MADE A DISTI NCTION BETWEEN THE INTERPRETATION OF THE LAW AND BRINGING TO THE ATTEN TION OF THE ITO THE RELEVANT PROVISION OF LAW AND IF THE AUDIT PARTY INTERPRETED THE LAW, THEN THE REPORT BY THE AUDIT PARTY CANNOT BE REGARDED AS 'INFORMATION' FOR THE PURPOSE OF REOPENING AN ASSESSMENT UNDER S. 147(B) OF THE ACT. HOWEVER, IF THE AUDIT PARTY HAS MERELY DRAWN THE ATTENTION O F THE ITO TO THE EXISTENCE OF THE LAW, THE OPINION OF THE AUDIT PART Y WOULD BE REGARDED AS INFORMATION AND THE SUPREME COURT HAS MADE A DISTINCTION BETWEE N THE COMMUNICATION OF LAW AND INTERPRETATION OF LAW. TH AT IS HOW, THE HONBLE MADRAS HIGH COURT HELD THAT THE AUDIT REPOR T SHOULD BE REGARDED AS A COMMUNICATION OF LAW AND THERE IS NO INTERPRET ATION OF LAW INVOLVED IN THE MATTER. THE TRIBUNAL ORDER, HOLDING THAT THE AUDIT PARTY HAD INTERPRETED THE RELEVANT PROVISIONS RELATING TO THE GRANTING OF EXTRA DEPRECIATION ALLOWANCE AND THUS THE AO HAD NO JURIS DICTION UNDER S. 147(B) OF THE ACT TO REOPEN THE ASSESSMENT, WAS SET ASIDE. 8.5. IT IS DISCERNIBLE FROM A CLOSE LOOK AT THE ABO VE THREE JUDGMENTS RENDERED BY THE HONBLE APEX COURT THAT WHERE THE A UDIT PARTY INTERPRETS THE PROVISION OF LAW IN A MANNER CONTRARY TO WHAT T HE AO HAD DONE, IT ITA NO.1615/DEL/2008 20 DOES NOT LAY DOWN A VALID BEDROCK FOR THE INITIATIO N OF RE-ASSESSMENT PROCEEDINGS. IF HOWEVER, THE AUDIT PARTY DOES NOT OFFER ITS OWN INTERPRETATION TO THE PROVISIONS AND SIMPLY COMMUNI CATES THE EXISTENCE OF LAW TO THE AO OR ANY OTHER FACTUAL INACCURACY, THE N THE INITIATION OF REASSESSMENT ON SUCH BASIS CANNOT BE ECLIPSED. IT C AN BE SEEN THAT IN THE CASE OF INDIAN AND EASTERN NEWSPAPERS SOCIETY (SUPRA) , THE OTHERWISE TAXABILITY OF RECEIPT FROM OCCUPATION OF CONFERENCE HALL AND ROOMS WAS NOT DISPUTED. WHEREAS THE AO HELD SUCH AMOUNT TO B E TAXABLE AS BUSINESS INCOME, THE AUDIT PARTY HELD IT TO BE TA XABLE AS INCOME FROM HOUSE PROPERTY. IT WAS THIS ADOPTION OF A DIFFERE NT INTERPRETATION BY THE INTERNAL AUDIT PARTY TO THE EXISTING FACTUAL POSITI ON, WHICH WAS NOT APPROVED BY THE HONBLE SUPREME COURT AS A GOOD GRO UND TO INITIATE A VALID RE-ASSESSMENT. SIMILARLY, IN THE CASE OF LUCAS TVS LTD. (SUPRA), THE AO ALLOWED DEDUCTION U/S 35(2) FOR THE AMOUNTS SPEN T IN THIS YEAR AS WELL AS THE EARLIER YEARS AND THE INTERNAL AUDIT PARTY OPINED THAT ONLY THE AMOUNT SPENT DURING THE YEAR WAS ALLOWABLE AS DEDUC TION U/S 35(2). IT IS OBVIOUS THAT IN BOTH THESE CASES, THE AOS OPINION ON THE INTERPRETATION OF THE RELEVANT PROVISION WAS OVERRULED BY THE INTERNA L AUDIT PARTY. IN ITA NO.1615/DEL/2008 21 CONTRAST, IN THE CASE OF PVS BEEDIS PVT. LTD . (SUPRA) , THE ASSESSEE CLAIMED DEDUCTION U/S 80G AND THE INTERNAL AUDIT PARTY POIN TED OUT THAT SUCH DEDUCTION WAS NOT PERMISSIBLE BECAUSE THE REGISTRAT ION OF THE TRUST TO WHICH CONTRIBUTION WAS MADE HAD ALREADY EXPIRED. IT IS MANIFEST THAT IN THE CASE OF PVS BEEDIS PVT. LTD. (SUPRA) , THE AUDIT PARTY DID NOT INTERPRET SECTION 80G IN A DIFFERENT MANNER, BUT, SIMPLY DREW THE ATTENTION OF THE AO TO THE EXISTENCE OF LAW. THE HONBLE SUPREME COU RT IN INDIAN AND EASTERN NEWSPAPERS SOCIETY (SUPRA) HAVING HELD THAT THE INTERPRETATION OF THE INTERNAL AUDIT PARTY ON A POINT OF LAW DOES NOT CONSTITUTE INFORMATION U/S 147, DREW A LINE OF DISTINCTION B ETWEEN THE CASES OF INTERPRETATION OF LAW AND COMMUNICATION OF EXISTENC E OF LAW. IF THE AUDIT PARTY MERELY DRAWS THE ATTENTION OF THE AO TO THE E XISTENCE OF LAW, THE OPINION OF THE AUDIT PARTY CAN BE REGARDED AS INFO RMATION LEADING TO A VALID INITIATION OF REASSESSMENT. IN A NUTSHELL, W HEREAS THE INITIATION OF RE- ASSESSMENT PROCEEDINGS ON THE BASIS OF AN INTERPRET ATION TO THE PROVISIONS OF LAW BY THE AUDIT PARTY IS FORBIDDEN, THE COMMUNI CATION OF EXISTENCE OF LAW OR THE FACTUAL INCONSISTENCIES BY THE INTERNAL AUDIT PARTY, DOES NOT OPERATE AS A HINDRANCE IN THE INITIATION OF RE-ASSE SSMENT PROCEEDINGS. ITA NO.1615/DEL/2008 22 8.6. NOW, LET US EXAMINE WHETHER THE FACTS OF INSTA NT CASE FALL ON THIS SIDE OR THAT SIDE OF THE DIVIDING LINE. WE HAVE RE PRODUCED ABOVE THE RELEVANT AUDIT OBJECTION RAISED BY THE SR. AUDIT OF FICER AS PER HIS REPORT DATED 10.2.2005. A CLOSE LOOK AT SUCH OBJECTION DIV ULGES THAT THE FIRST PARA IS A COMMUNICATION OF THE EXISTENCE OF LAW ABO UT THE CHARGEABILITY OF CAPITAL GAIN IN RESPECT OF INTANGIBLE ASSETS, WITHO UT ANY REFERENCE TO THE FACTS OF THE INSTANT CASE. IN THE SECOND PARA, THE AUDIT PARTY POINTED OUT THAT THE ASSESSEE RECEIVED A SUM OF RS.173 LAC AS C ONSIDERATION FOR THE TRANSFER OF EXCLUSIVE DISTRIBUTION RIGHTS ON AIR CO NDITIONER AND WATER COOLER WHICH WAS CREDITED TO CAPITAL RESERVE ACCOUN T AND WAS NOT TREATED BY THE ASSESSEE AS INCOME FOR THE YEAR. TH E AUDIT PARTY SUGGESTED THAT THIS AMOUNT WAS CHARGEABLE UNDER THE HEAD CAP ITAL GAINS AND NON- INCLUSION OF THIS AMOUNT IN THE ASSESSEES TOTAL IN COME RESULTED INTO THE ESCAPEMENT OF INCOME TO THAT EXTENT. IT SHOWS THAT THE AO WAS SIMPLY INFORMED ABOUT A FACT WHICH HAD ESCAPED HIS ATTENTI ON DURING THE COURSE OF ASSESSMENT PROCEEDINGS TO THE EFFECT THAT A SUM OF RS.173 LAC WAS A CONSIDERATION FOR THE TRANSFER OF EXCLUSIVE DISTRIB UTION RIGHTS WHICH WAS RECEIVED BUT NOT TAKEN TO THE PROFIT & LOSS ACCOUNT . IT WAS CONVEYED ITA NO.1615/DEL/2008 23 THAT SUCH AMOUNT IS CHARGEABLE TO TAX U/S 45(1) OF THE ACT WHICH IS NOTHING, BUT, COMMUNICATION OF LAW TO THE AO. WE A RE NOT CONFRONTED WITH A SITUATION IN WHICH THE AO, AFTER DUE CONSIDE RATION OF THE MATTER IN THE ORIGINAL ASSESSMENT PROCEEDINGS, INTERPRETED SE CTION 45(1) AS NOT APPLICABLE TO TRANSFER OF INTANGIBLE ASSET, BUT THE AUDIT PARTY INTERPRETED THIS PROVISION IN A DIFFERENT MANNER FROM THE WAY IN WHICH IT WAS INTERPRETED BY THE AO AND THEN SUGGESTED THAT THE A MOUNT OUGHT TO HAVE BEEN CHARGED TO TAX. THE INSTANT CASE IS FULLY COVE RED BY THE JUDGMENT IN THE CASE OF PVS BEEDIS PVT. LTD. (SUPRA) READ WITH THE EXCEPTION FORMULATED BY THE HONBLE SUPREME COURT IN INDIAN & EASTERN NEWSPAPERS SOCIETY (SUPRA) DRAWING A LINE OF DISTINCTION BETWEEN COMMUNICATION OF LAW AND INTERPRETATION OF LAW. TH E CONTENTION OF THE LD. AR ON THIS ISSUE, BEING DEVOID OF ANY MERIT, IS HEREBY JETTISONED. IT IS, THEREFORE, HELD THAT THE AUDIT OBJECTION IN THE INS TANT CASE CONSTITUTED AN INFORMATION ABOUT THE ESCAPEMENT OF INCOME TO THE A O, THEREBY JUSTIFYING THE INITIATION OF REASSESSMENT. ITA NO.1615/DEL/2008 24 III. NO TANGIBLE MATERIAL TO JUSTIFY INITIATION R EASSESSMENT 9.1. RELYING ON THE JUDGMENT OF THE HONBLE SUMMIT COURT IN KELVINATOR OF INDIA (SUPRA) , THE LD. AR CONTENDED THAT NO REASSESSMENT CAN BE TAKEN UP IN THE ABSENCE OF ANY TANGIBLE MATERIAL IN THE H ANDS OF THE AO SHOWING ESCAPEMENT OF INCOME. HE SUBMITTED THAT SINCE THERE WAS NO TANGIBLE MATERIAL WITH THE AO IN THE INSTANT CASE, THE REASS ESSMENT WAS LIABLE TO BE QUASHED. THE LD. DR COUNTERED THIS ARGUMENT. 9.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD, WE FIND IT AS AN UNDISPUTED POSITION THA T THE HONBLE APEX COURT HAS LAID DOWN IN NO UNCERTAIN TERMS THAT THE CONCEPT OF 'CHANGE OF OPINION' IS AN ESSENTIAL SAFEGUARD TO PROTECT UNWAR RANTED REASSESSMENTS AND HENCE THE AO HAS POWER TO REOPEN, PROVIDED THER E IS A 'TANGIBLE MATERIAL' FOR COMING TO THE CONCLUSION THAT SOME INCOME ESCAPED ASSESSMENT. WE RESPECTFULLY BOW BEFORE THIS RATIO DECIDENDI AS THE LOGIC IS SIMPLE THAT ONLY THE EXISTENCE OF SOME TANGIBLE MATERIAL WOULD OUST THE CASE OF CHANGE OF OPINION. 9.3. HOWEVER, IN THE FACTS AND CIRCUMSTANCES OF T HE PRESENT CASE, WE FIND ITA NO.1615/DEL/2008 25 THE REQUIREMENT OF THE EXISTENCE OF SOME TANGIBLE M ATERIAL SHOWING ESCAPEMENT OF INCOME, HAS BEEN DULY MET WITH. IT C AN BE NOTICED FROM THE FACTUAL MATRIX DISCUSSED ABOVE THAT IT WAS ONLY AFTER THE COMPLETION OF ORIGINAL ASSESSMENT THAT THE AUDIT OBJECTION WAS RA ISED BY THE AUDIT PARTY ON 10.02.2005, WHICH LED TO THE INITIATION OF REASS ESSMENT BY RECORDING SUCH REASONS ON 30.05.2005. IN AN EARLIER PARA, WE HAVE HELD THAT THE AUDIT OBJECTION IN THE INSTANT CASE IS A VALID PIEC E OF INFORMATION ABOUT THE ESCAPEMENT OF INCOME. SUCH AUDIT OBJECTION IS NOTHI NG BUT A TANGIBLE MATERIAL. AS THIS TANGIBLE MATERIAL, IN THE SHAPE O F AUDIT OBJECTION, CAME INTO EXISTENCE AFTER THE COMPLETION OF THE ORIGINAL ASSESSMENT AND LED TO THE INITIATION OF REASSESSMENT, WE HOLD THIS REPORT OF THE INTERNAL AUDIT PARTY, FORMED A VALID FOUNDATION FOR THE INITIATIO N OF REASSESSMENT PROCEEDINGS, THEREBY PUSHING THE CASE OUTSIDE THE AMBIT OF `CHANGE OF OPINION. 10. IN VIEW OF THE FOREGOING DISCUSSION, WE HOLD THAT ALL THE OBJECTIONS TAKEN BY THE LD. AR AGAINST THE INITIATION OF REASS ESSMENT ARE LEGALLY UNSUSTAINABLE. THESE DESERVE TO BE AND ARE HEREBY R EJECTED. EX CONSEQUENTI , GROUND NO. 1 CHALLENGING THE INITIATION OF REASSE SSMENT ITA NO.1615/DEL/2008 26 PROCEEDINGS IS NOT ALLOWED. 11. GROUND NO. 2 OF THE ASSESSEES APPEAL IS AGAINS T THE TAXABILITY OF RS.1.73 CRORE RECEIVED AGAINST THE TRANSFER OF EXCL USIVE DISTRIBUTION RIGHTS, ON MERITS. BRIEFLY STATED, THE FACTS OF THE GROUND ARE THAT THE ASSESSEE GAVE NOTE NO.10 TO ITS ACCOUNTS, READING AS UNDER: - 10. A SUM OF RS.173 LACS RECEIVED FROM M/S DAIKIN SHRIRAM AIR-CONDITIONING PRIVATE LIMITED AS CONSIDERATION FOR THE TRANSFER OF EXCLUSIVE DISTRIB UTION RIGHTS OF AIR-CONDITIONER AND WATER COOLER HAS BEEN CREDITED TO CAPITAL RESERVE ACCOUNT AND OUT OF THE CONSIDERATION OF RS.27 LACS FOR THE TRANSFER OF ASS ETS, A SUM OF RS.13.32 LACS HAS BEEN CREDITED TO RESPECTIV E ASSETS ACCOUNT AND THE BALANCE RS.14.68 LACS TO PRO FIT AND LOSS ACCOUNT. 12. THE FACTUAL MATRIX LEADING TO THE ABOVE NOTE IS THAT ASSESSEE COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF CONSUM ER DURABLES, SUCH AS, SEWING MACHINES, KITCHEN APPLIANCES, ROOM HEATE RS, ETC., RECEIVED A SUM OF RS.1.73 CRORE FROM M/S DAIKIN SHRIRAM AIR-CO NDITIONING PVT. LTD. (HEREINAFTER ALSO CALLED DAIKIN OR JVC) AS A CONSID ERATION FOR THE TRANSFER OF EXCLUSIVE DISTRIBUTION RIGHTS OF AIR-CONDITIONER S AND WATER COOLERS BUSINESS. THE AO OBSERVED THAT THIS AMOUNT WAS DIRE CTLY TAKEN TO THE ITA NO.1615/DEL/2008 27 CAPITAL RESERVE ACCOUNT WITHOUT OFFERING IT FOR TAX ATION. IT WAS OPINED THAT SUCH AMOUNT WAS CHARGEABLE TO TAX UNDER THE HE AD CAPITAL GAINS. ON BEING CALLED UPON TO EXPLAIN THIS POSITION, THE ASSESSEE STATED THAT NO COST WAS INCURRED TO ACQUIRE SUCH EXCLUSIVE DISTRIB UTION RIGHTS WHICH WAS IN THE NATURE OF INTANGIBLE ASSET AND HENCE INCAPAB LE OF VALUATION. IN THE ABSENCE OF ANY PROVISION TO COMPUTE THE COST OF ACQ UISITION OF SUCH RIGHTS/INTANGIBLE ASSETS, THE ASSESSEE CONTENDED TH AT THE AMOUNT RECEIVED AGAINST ITS TRANSFER COULD NOT BE CHARGED TO TAX AS INCOME UNDER SECTION 45 OF THE ACT. THE AO REFUSED TO ACCEPT SUCH CONTENTI ON BY HOLDING THAT THE DISTRIBUTION RIGHTS TRANSFERRED BY THE ASSESSEE WER E IN THE NATURE OF A SELF GENERATED ASSET LIKE `GOODWILL. THIS VIEW OF THE AO WAS BASED ON THE PREMISE THAT THE ASSESSEE TRANSFERRED NOT ONLY DIST RIBUTION RIGHTS TO DAIKIN BUT ALSO CERTAIN BENEFITS AND ADVANTAGES ATTACHED T O ITS NAME. ON A PERUSAL OF THE BUSINESS PURCHASE AGREEMENT (HEREINA FTER ALSO CALLED `THE AGREEMENT) UNDER WHICH SUCH DISTRIBUTION RIGHTS W ERE TRANSFERRED, THE AO OPINED THAT THOUGH THE ASSESSEE GAVE IT A NOMENC LATURE OF TRANSFER OF EXCLUSIVE DISTRIBUTION RIGHT, BUT IN REALITY, IT WAS NOTHING BUT THE TRANSFER OF `GOODWILL IN FAVOUR OF DAIKIN. INVOKING THE PR OVISIONS OF SECTION ITA NO.1615/DEL/2008 28 55(2)(A)(II), THE AO HELD THAT THE COST OF ACQUISIT ION OF GOODWILL WAS NIL AND HENCE THE ENTIRE AMOUNT WAS CHARGEABLE UNDER TH E HEAD `CAPITAL GAINS. THE LD. CIT(A) NOTICED THAT THE AGREEMENT C LEARLY DEPICTED THAT THE ASSESSEE TRANSFERRED ONGOING BUSINESS OF THE EX CLUSIVE DISTRIBUTION RIGHTS OF AIR-CONDITIONERS AND WATER COOLERS WHICH RESULTED IN TRANSFERRING THE WHOLE ADVANTAGE OF ITS REPUTATION, CONNECTIONS WITH CUSTOMERS, ALL THE ASSETS IN DISTRIBUTION NETWORK AND ALL THE COMPONEN TS, WHICH WERE ATTRIBUTABLE TO EARNING PROFITS OVER A COURSE OF YE ARS BECAUSE OF ITS REPUTATION, LOCATION, DISTRIBUTION NETWORK AND OTHE R FEATURES. HE AFFIRMED THE VIEW OF THE AO THAT THE ASSESSEE TRANSFERRED `G OODWILL AND, HENCE, THE AMOUNT WAS RIGHTLY CHARGED UNDER THE HEAD `CAPI TAL GAINS. THE ASSESSEE IS AGAINST THE CONFIRMATION OF THIS ADDITI ON. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. AR CONTENDED THAT THE A MOUNT OF RS.1.73 CRORE CANNOT BE CHARGED TO TAX AS IT IS IN THE NATU RE OF A CAPITAL RECEIPT ARISING FROM THE TRANSFER OF A SOURCE OF INCOME. E LABORATING FURTHER, HE STATED THAT THE ASSESSEE, APART FROM SELLING AIR CO NDITIONERS AND WATER COOLERS, WAS ALSO ENGAGED IN THE BUSINESS OF MANUFA CTURING AND SELLING OF ITA NO.1615/DEL/2008 29 SEWING MACHINES, AIR FANS, ETC. IT WAS SUBMITTED T HAT UNDER THE AGREEMENT, THE ASSESSEE TRANSFERRED ITS BUSINESS OF EXCLUSIVE DISTRIBUTORSHIP OF AIR CONDITIONERS AND WATER COOLE RS FOR THE STATED CONSIDERATION. SINCE SUCH BUSINESS CONSTITUTED A S OURCE OF INCOME, THE AMOUNT SHOULD BE CONSTRUED AS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX, BEING A CONSIDERATION FOR THE TRANSFER OF A SOURCE OF INCOME. TO BOLSTER THIS SUBMISSION, HE RELIED ON THE JUDGMENT OF THE H ONBLE SUPREME COURT IN THE CASE OF KETTLEWELL BULLEN AND CO. LTD. VS. CIT (1964) 53 I TR 261 (SC), AND THAT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF KHANNA AND ANNADHANAM VS. CIT (2013) 351 ITR 110 (D EL) . 14. THERE CAN BE NO DISPUTE ON THE PROPOSITION TH AT IF THERE IS A RECEIPT ARISING FROM THE LOSS OF A SOURCE OF INCOME, RATHER THAN THE LOSS OF A PARTICULAR INCOME, THEN, IT CANNOT BE CHARGED TO T AX. HOWEVER, THIS RULE IS NOT WITHOUT EXCLUSION. THE EXCEPTION IS THAT SUCH A CAPITAL RECEIPT SHOULD NOT BE OTHERWISE CHARGEABLE TO TAX UNDER SOME OTHER SPECIFIC PROVISIONS OF THE ACT OR SHOULD NOT ARISE FROM THE TRANSFER OF A CAPITAL ASSET WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS. THE FIR ST CATEGORY OF CAPITAL RECEIPTS CHARGEABLE TO TAX, OTHERWISE THAN BY WAY O F TRANSFER OF A CAPITAL ITA NO.1615/DEL/2008 30 ASSET, CAN INCLUDE THE AMOUNTS REFERRED TO IN AND S UBJECT TO THE PROVISIONS OF SECTION 56(2)(V) AND (VI) ETC. THE SECOND CATEG ORY COVERS THE CASES IN WHICH A CAPITAL ASSET IS TRANSFERRED AND THE AMOUNT SO RECEIVED ON TRANSFER OF A CAPITAL ASSET IS CHARGEABLE UNDER THE PROVISIO NS OF CHAPTER IV-E OF THE ACT. BUT FOR THESE TWO TYPES OF CATEGORIES, A CAPITAL RECEIPT IS NOT CHARGEABLE TO TAX TO BE GOVERNED BY THE RATIO LAID DOWN IN THESE TWO JUDGMENTS CITED BY THE LD. AR. THE ABOVE REFERRED S ECOND CATEGORY NEEDS A LITTLE MORE ELABORATION. THE POSITION IS THAT IF AN AMOUNT IS RECEIVED BY AN ASSESSEE ON TRANSFER OF A CAPITAL ASSET, WHICH I S OTHERWISE NOT CHARGEABLE TO TAX U/S 45 DUE TO ONE REASON OR THE O THER, THEN IT WOULD NOT MAGNETIZE TAXATION. IF, HOWEVER, THE RECEIPT IS ON ACCOUNT OF TRANSFER OF AN ASSET, WHICH FALLS WITHIN THE DEFINITION OF CAPI TAL ASSET U/S 2(14) OF THE ACT AND THE PROVISIONS OF CHAPTER IV-E FULLY APPLY, THEN, THERE CAN BE NO ESCAPE FROM THE CHARGEABILITY OF INCOME UNDER THE H EAD CAPITAL GAINS. 15. THE LEGISLATURE HAS INSERTED AN EXPLANATION T O SECTION 2(14) BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1. 4.1962, WHICH READS AS UNDER:- ITA NO.1615/DEL/2008 31 EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HEREB Y CLARIFIED THAT 'PROPERTY' INCLUDES AND SHALL BE DEEMED TO HAVE ALW AYS INCLUDED ANY RIGHTS IN OR IN RELATION TO AN INDIAN COMPANY, INCL UDING RIGHTS OF MANAGEMENT OR CONTROL OR ANY OTHER RIGHTS WHATSOEVE R. 16. AN EXAMINATION OF THE EXPLANATION DIVULGES TH AT RIGHTS OF MANAGEMENT OR CONTROL OR ANY OTHER RIGHTS WHATSOEVE R FALL WITHIN THE DEFINITION OF CAPITAL ASSET WITH RETROSPECTIVE EFFE CT FROM 1.4.1962 AND RESULTANTLY THEIR TRANSFER WOULD ATTRACT CHARGEABIL ITY UNDER THE HEAD CAPITAL GAINS, SUBJECT TO THE FULFILLMENT OF THE PRESCRIPTION OF THE PROVISIONS CONTAINED IN THE CHAPTER IV-E. SECTION 45, WHICH IS A CHARGING PROVISION OF THIS CHAPTER, PROVIDES THROUG H SUB-SECTION (1) THAT ANY PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET, EFFECTED IN THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME-TAX UNDER THIS HEAD. MODE OF COMPUTATION OF INCOME UNDER THIS HEAD IS EN SHRINED IN SECTION 48, WHICH PROVIDES THAT THE AMOUNT OF (I) EXPENDITU RE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER; AND ( II) THE COST OF ACQUISITION OF THE ASSET AND THE COST OF ANY IMPROV EMENT SHALL BE DEDUCTED FROM THE FULL VALUE OF THE CONSIDERATION R ECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. THE HONBLE SUPREME COURT IN ITA NO.1615/DEL/2008 32 CIT VS. B.C. SRINIVASA SHETTY (1981)128 ITR 294 (SC ) , CONSIDERED A CASE IN WHICH THE ASSESSEE TRANSFERRED ITS GOODWILL FOR A CONSIDERATION. SINCE THE GOODWILL DID NOT HAVE ANY COST OF ACQUISITION, THE HONBLE SUPREME COURT HELD THAT THE PROVISIONS OF SECTION 45(1) WOU LD FAIL DUE TO THE IMPOSSIBILITY OF COMPUTATION OF CAPITAL GAIN U/S 48 BECAUSE OF THE ABSENCE OF A VALUE OF THE ONE OF THE INGREDIENTS, NAMELY, COST OF ACQUISITION. THE LEGISLATURE STEPPED IN BY MAKING AN AMENDMENT T O SECTION 55(2) W.E.F. 1.4.1995 BY PROVIDING THAT IF A CAPITAL ASSE T IN THE NATURE OF GOODWILL OR TENANCY RIGHTS OR STAGE CARRIAGE PERMIT S OR LOOMS HOURS OF A BUSINESS IS TRANSFERRED, THEN ITS COST OF ACQUISITI ON SHALL BE TAKEN AS NIL, UNLESS THE ASSESSEE PURCHASED IT FROM A PREVIOUS OW NER BY PAYING SOME PURCHASE PRICE. WITH THE INSERTION OF THIS PROVISI ON, THE RATIO LAID DOWN IN B.C. SRINIVASA SHETTY (SUPRA) TO THIS EXTENT HAS BECAME INAPPLICABLE TO THE TRANSFER OF A CAPITAL ASSET IN THE NATURE OF GO ODWILL OR TENANCY RIGHTS OR STAGE CARRIAGE PERMITS OR LOOMS HOURS BECAUSE OF T HE PROVISION MANDATING THAT THE COST OF ACQUISITION OF SUCH ASSE TS SHALL BE TAKEN AT NIL. THE NET RESULT OF THIS AMENDMENT TO SECTION 55(2) I S THAT WHERE A CAPITAL ASSET IN THE NATURE OF GOODWILL OR TENANCY RIGHTS O R STAGE CARRIAGE PERMITS ITA NO.1615/DEL/2008 33 OR LOOMS HOURS IS TRANSFERRED BY AN ASSESSEE FOR A CONSIDERATION, EVEN THOUGH THERE IS NO IDENTIFIABLE COST OF ACQUISITION OF SUCH GOODWILL ETC, STILL THE CAPITAL GAIN SHALL BE COMPUTED U/S 45 BY TAKING SUCH COST OF ACQUISITION AT NIL. THE FINANCE ACT, 1997 INCREASE D THE LIST OF SUCH CAPITAL ASSETS HAVING NIL COST OF ACQUISITION BY IN CLUDING A RIGHT TO MANUFACTURE, PRODUCE, PROCESS ANY ARTICLE OR THING W.E.F. 1.4.1998. THE LIST OF SUCH CAPITAL ASSETS WITH NIL COST OF ACQUIS ITION GOT FURTHER EXPANDED BY THE INSERTION OF A TRADE MARK OR BRAND NAME ASS OCIATED WITH A BUSINESS BY THE FINANCE ACT, 2001 W.E.F. 1.4.2002. THE FINANCE ACT, 2002 STILL FURTHER INCREASED THE AMBIT OF SUCH CAPI TAL ASSETS WITH NIL COST OF ACQUISITION BY INTRODUCING A RIGHT TO CARRY ON ANY BUSINESS W.E.F. 1.4.2003. WITH THE INCLUSION OF AFORE STATED CAPIT AL ASSETS IN SECTION 55(2), THE CHARGEABILITY TO TAX OF THE PROFIT ON TH EIR TRANSFER UNDER THE HEAD CAPITAL GAINS HAS BECOME MANDATORY DESPITE T HERE BEING NO COST OF ACQUISITION. 17. WE COME BACK TO THE ARGUMENT OF THE LD. AR, R ELYING ON THE DECISIONS IN THE CASE OF KETTLEWELL BULLEN & CO. LTD. (SUPRA) KHANNA AND ANNADHANAM (SUPRA), THAT A CAPITAL RECEIPT FOR TRANSFER OF A SOURCE OF ITA NO.1615/DEL/2008 34 INCOME IS NOT CHARGEABLE TO TAX. THE CONTENTION O F THE LD. AR THAT ANY AMOUNT RECEIVED IN LIEU OF A SOURCE OF INCOME IS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX, IN OUR CONSIDERED OPINION, IS P ARTLY CORRECT. WE HAVE NOTED ABOVE THAT SECTION 55(2) LISTS CERTAIN CAPIT AL ASSETS WHICH ARE IN THE NATURE OF SOURCE OF INCOME, SUCH AS, A RIGHT TO MAN UFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON A NY BUSINESS. WHILE COMPUTING THE CAPITAL GAIN ON THE TRANSFER OF SUCH CAPITAL ASSETS, THEIR COST OF ACQUISITION, UNLESS ANY PURCHASE PRICE WAS PAID AT THE TIME OF THEIR ACQUISITION, IS TO BE TAKEN AT NIL. THE VIEW CANVA SSED ON BEHALF OF THE ASSESSEE FOR SPARING THE AXE OF TAXATION IN CASE OF TRANSFER OF SOURCE OF INCOME FOR A CONSIDERATION IS CORRECT, WHEN SUCH SO URCE OF INCOME IS IN THE NATURE OF CAPITAL ASSET, BEING NOT ANY OF THOSE SPECIFIED IN SECTION 55(2). IF HOWEVER, THE SOURCE OF INCOME IN THE NATU RE OF A CAPITAL ASSET TRANSFERRED IS ONE OF THOSE SET OUT IN SECTION 55(2 )(A), THEN, THERE WOULD ARISE INCOME UNDER THE HEAD CAPITAL GAINS. 18. LET US EXAMINE THE FACTS OF THE JUDICIAL DEC ISIONS RELIED BY THE LD. AR. IN THE FIRST CASE OF KETTLEWELL BULLEN & CO. LTD. (SUPRA) , THE HONBLE SUPREME COURT NOTICED THAT THE ASSESSEE, WHO WAS HO LDING A MANAGING ITA NO.1615/DEL/2008 35 AGENCY, AGREED TO PART WITH THE SAME FOR SOME COMPE NSATION. IT WAS HELD THAT SINCE THE MANAGING AGENCY FOREGONE WAS IN THE NATURE OF A SOURCE OF INCOME, THE COMPENSATION SO RECEIVED SHOULD CONSTIT UTE A CAPITAL RECEIPT FOR LOSS OF SOURCE OF INCOME AND HENCE NOT LIABLE F OR TAX. SIMILAR IS THE POSITION IN THE CASE OF KHANNA AND ANNADHANAM (SUPRA). IN THAT CASE, THE ASSESSEE, A CA FIRM WAS REPRESENTING DHS FOR A LONG PERIOD OF 13 YEARS. BY VIRTUE OF AN AGREEMENT, THE ASSESSEES S ERVICES WERE RELEASED AND IN CONSIDERATION OF THE TERMINATION, A COMPENS ATION WAS GIVEN. THE AO TOOK THE VIEW THAT THE RECEIPT WAS TAXABLE AS PR OFESSIONAL INCOME. WHEN THE MATTER FINALLY REACHED THE HONBLE HIGH CO URT, THEIR LORDSHIPS HELD THE RECEIPT REPRESENTING COMPENSATION FOR THE LOSS OF A SOURCE OF INCOME AND HENCE NOT CHARGEABLE TO TAX. IT IS MANIF EST FROM THE JUDGMENT IN THE CASE OF KETTLEWELL BULLEN & CO. LTD. (SUPRA) THAT THE ASSESSMENT YEAR UNDER CONSIDERATION IS 1953-54 AND IN THE CASE OF KHANNA AND ANNADHANAM (SUPRA) IT IS 1997-98, WHEN NONE OF THE CAPITAL ASSETS IN THE NATURE OF INCOME PRODUCING SOURCE WAS COVERED WITHI N THE AMBIT OF SECTION 55(2) OF THE ACT. THE RATIO DECIDENDI LAID DOWN IN KETTLEWELL BULLEN & CO. LTD. (SUPRA) AND KHANNA AND ANNADHANAM (SUPRA) WOULD ITA NO.1615/DEL/2008 36 SQUARELY APPLY ONLY TO SUCH CASES OF TRANSFER OF A SOURCE OF INCOME FOR A CONSIDERATION, WHICH DO NOT FALL IN THE CATEGORY OF ANY OF THE CAPITAL ASSETS SPECIFIED IN SECTION 55(2). IT CANNOT EXTEND TO CASES, WHERE THE SOURCE OF INCOME TRANSFERRED IS IN THE NATURE OF CA PITAL ASSET SET OUT IN SECTION 55(2). 19. COMING BACK TO THE FACTS OF THE INSTANT CASE, THE CONTROVERSY BOILS DOWN IN DETERMINING THE TRUE NATURE OF ASSET TRANSF ERRED BY THE ASSESSEE TO DAIKIN UNDER THE BUSINESS PURCHASE AGREEMENT ENTERE D ON 1.5.2000. THE LD. AR FAIRLY ADMITTED THAT THE ASSESSEE TRANSFERRE D A CAPITAL ASSET IN TERMS OF SECTION 2(14) OF THE ACT, WHICH IS IN THE NATURE OF RIGHT TO CARRY ON BUSINESS. AS SUCH, WE WILL CONCENTRATE ON ASCERTAI NING FROM THE TERMS OF THE BUSINESS PURCHASE AGREEMENT IF THE CAPITAL ASSE T TRANSFERRED IS IN THE NATURE OF `GOODWILL OR ` RIGHT TO CARRY ON BUSINES S? THE AGREEMENT IS BETWEEN THE ASSESSEE CARRYING ON THE BUSINESS, INTER ALIA , OF EXCLUSIVE DISTRIBUTION OF AIR-CONDITIONERS AND WATER COOLERS MANUFACTURED BY SIEL AIRCON LTD. (SAL) ON ONE HAND AND DAIKIN SHRIRAM AI RCONDITIONING PRIVATE LIMITED, ON THE OTHER, WHICH IS A JOINT VEN TURE BETWEEN DAIKIN INDUSTRIES LTD. AND SIEL LTD. AT THIS STAGE, WE WA NT TO MAKE IT CLEAR THAT ITA NO.1615/DEL/2008 37 SAL WHICH WAS MANUFACTURING AIR-CONDITIONERS AND WA TER COOLERS TO BE DISTRIBUTED BY THE ASSESSEE, IS A RELATED CONCERN O F THE ASSESSEE. SAL TOOK OVER THE BUSINESS OF MANUFACTURING AIR CONDITIONS A ND WATER COOLER EQUIPMENTS FROM SIEL LTD. ON 1.4.1996. THESE PRODUC TS WERE SOLD UNDER THE BRAND NAME OF `SHRIRAM BY SIEL LTD. ON 16.10.1 996, SAL TRANSFERRED DISTRIBUTION RIGHTS TO THE ASSESSEE UND ER AN AGREEMENT, A COPY OF WHICH HAS BEEN PLACED ON RECORD. AS PER THIS AGR EEMENT, THE ASSESSEE WAS APPOINTED AS A `DISTRIBUTOR FOR THE PRODUCTS, INCLUDING BUT NOT RESTRICTING TO AIR CONDITIONERS AND WATER COOLERS M ANUFACTURED BY SAL. CLAUSE 1 OF THIS AGREEMENT PROVIDES THAT IT IS ON P RINCIPAL TO PRINCIPAL BASIS AND IS FOR THE TERRITORY OF ENTIRE WORLD INCL UDING INDIA. THE ASSESSEE WAS OBLIGED UNDER THIS AGREEMENT TO PURCHASE THE PR ODUCTS FROM SAL AND WAS ALSO REQUIRED TO OFFER AFTER-SALES SERVICES. TH OUGH THE TENURE OF THIS AGREEMENT HAS BEEN MENTIONED AS ONE YEAR, BUT THE L D. AR STATED THAT IT CONTINUED TO OPERATE TILL THE ASSESSEE TRANSFERRED THE DISTRIBUTOR RIGHTS, ACQUIRED UNDER THIS AGREEMENT, TO DAIKIN UNDER THE BUSINESS PURCHASE AGREEMENT DATED 1.5.2000, FOR WHICH IT WAS PAID CON SIDERATION OF RS.1.73 CRORE IN LIEU OF TRANSFER OF SUCH `BUSINESS. IT IS ALSO PERTINENT TO MENTION ITA NO.1615/DEL/2008 38 THAT SIMULTANEOUS WITH THE ASSESSEE TRANSFERRING IT S BUSINESS UNDER THE AGREEMENT, SAL ALSO ENTERED INTO AN AGREEMENT ON 8. 8.2000 WITH DAIKIN, A COPY OF WHICH HAS ALSO BEEN PLACED ON RECORD. AS PER THIS AGREEMENT, SAL TRANSFERRED ITS MANUFACTURING BUSINESS TO DAIKI N FOR A SUM OF RS.10.93 CRORE. THUS THE SEQUENCE OF EVENTS IS THA T WHEREAS THE ACS AND WATER COOLERS WHICH WERE EARLIER MANUFACTURED BY SA L UNDER THE BRAND NAME OF `SHRIRAM AND SOLD THROUGH THE ASSESSEE ST OOD TRANSFERRED BY SAL AS WELL AS THE ASSESSEE TO DAIKIN, WHICH EVENTU ALLY ACQUIRED THE HITHERTO MANUFACTURING RIGHTS FROM SAL AND DISTRIBU TION RIGHTS FROM THE ASSESSEE. WE AGAIN COME BACK TO THE FACTS OF THE ASSESSEE UNDER CONSIDERATION, WHO TRANSFERRED THE BUSINESS OF ACS AND WATER COOLERS TO DAIKIN FOR A CONSIDERATION OF RS.1.73 CRORE UNDER T HE AGREEMENT. WHEN WE PERUSE THE TERMS AND CONDITIONS OF THE AGREEMENT , IT TRANSPIRES THAT THE ASSESSEE AGREED TO SELL AND THE DAIKIN (I.E. TH E JOINT VENTURE COMPANY) AGREED TO PURCHASE THE ` SAID BUSINESS AND THE GOODWILL AND OTHER ASSETS THEREOF FROM THE ASSESSEE FOR THE STATED CONSIDERATION. THE TERM ` BUSINESS WHICH WAS TRANSFERRED PURSUANT TO THE AGREEMENT H AS BEEN DEFINED IN CLAUSE 1.1 TO MEAN: THE WHOLE OF THE BU SINESS IN RESPECT OF ITA NO.1615/DEL/2008 39 THE DISTRIBUTION, EXPORT, IMPORT, ASSEMBLY, INSTALL ATION, REPAIR, MAINTENANCE AND SERVICE OF PRODUCTS CARRIED ON BY UIL (I.E., THE ASSESSEE) . THE EXPRESSION PRODUCTS HAS BEEN DEFINED TO MEAN: AIR- CONDITIONERS AND WATER COOLERS. CLAUSE 2 OF THE AG REEMENT MANDATES THAT THE ASSESSEE SHALL SELL AND JVC SHALL PURCHAS E, ON THE COMPLETION DATE, THE BUSINESS AS A GOING CONCERN WITH ALL ASSO CIATED GOODWILL AND THE ASSETS FREE FROM ALL ENCUMBRANCES. THE TERM ` ASSETS HAS BEEN DEFINED IN THE AGREEMENT TO MEAN `(A) THE EXCLUSIVE BUSINESS RIGHT ; (B) THE TRANSFERRABLE DEPOSITS; AND (C) THE FIXED ASSET S. PURCHASE PRICE HAS BEEN GIVEN IN CLAUSE 3 TO MEAN THE AGGREGATE OF: (A ) THE CONSIDERATION FOR THE EXCLUSIVE BUSINESS RIGHTS SET OUT IN CLAUSE 4; (B) RS.27 LAC; AND (C) THE AMOUNT OF TRANSFERRABLE DEPOSIT AS REDUCED BY: (I) THE AMOUNT OF SECURITY DEPOSIT FROM THE DEALERS; (II) SALES ADVAN CED FROM DEALERS; AND (III) THE AMOUNT OF UNEXPIRED WARRANTY OBLIGATION. CONSIDERATION OF RS.1.73 CRORE IS FOR THE TRANSFER OF EXCLUSIVE BUSINESS RIGHT WHICH HAS BEEN DEFINED IN THE DEFINITION CLAUSE AS UNDER:- ITA NO.1615/DEL/2008 40 EXCLUSIVE BUSINESS RIGHT MEANS THAT EXCLUSIVE RIG HT OF JVC TO REPRESENT ITSELF AS CARRYING ON THE BUSINESS AS SUC CESSOR TO UIL INCLUDING: (A) ALL RECORDS OF THE BUSINESS INCLUDING RECORDS OF SU PPLIERS AND CUSTOMERS; (B) THE BENEFIT OF THE CURRENT ORDERS; (C) THE BENEFIT OF ALL BIDS AND PROPOSALS THAT HAVE BEE N MADE BY UIL TO CUSTOMERS; AND (D) ALL RIGHTS TO THE UILS DISTRIBUTION NETWORK FOR TH E BUSINESS EXCLUDING UILS COMPANY SHOPS. 20. A CAREFUL PERUSAL OF THE ABOVE CLAUSES OF TH E AGREEMENT DIVULGES THAT THE ASSESSEE RECEIVED A TOTAL SUM OF RS.2.0 CR ORE FROM THE JVC, CONSISTING OF TWO AMOUNTS, NAMELY, RS.1.73 CRORE AS A CONSIDERATION FOR THE TRANSFER OF EXCLUSIVE BUSINESS RIGHT OF AIR-CON DITIONER AND WATER COOLER BUSINESS AND A FURTHER SUM OF RS.27 LAC FOR TRANSFER OF ASSETS. OUT OF SUCH SUM OF RS.27 LAC FOR TRANSFER OF ASSETS, TH E ASSESSEE TRANSFERRED A SUM OF RS.13.32 LAC TO THE RESPECTIVE ASSETS ACCOUN TS AND THE BALANCE AMOUNT OF RS.14.68 LAC WAS CREDITED TO THE PROFIT & LOSS ACCOUNT. ITA NO.1615/DEL/2008 41 21. IN THE PRESENT APPEAL, WE ARE CONCERNED ONLY WITH THE TREATMENT OF RS.1.73 CRORE, RECEIVED AS A CONSIDERATION FOR THE TRANSFER OF EXCLUSIVE BUSINESS RIGHT OF AIR CONDITIONER AND WATER COOLER BUSINESS, CLAI MED BY THE ASSESSEE AS A CASE OF TRANSFER OF `BUSINESS A ND HELD BY THE AUTHORITIES AS A CASE OF TRANSFER OF `GOODWILL. THE DISPUTE N ARROWS DOWN TO DETERMINING THE NATURE OF THE ASSET TRANSFERRED, I. E. WHETHER GOODWILL OR BUSINESS. 22.1. IT IS VIVID THAT THE TERM `GOODWILL HAS NO T BEEN EXPRESSLY DEFINED IN THE ACT EXCEPT MENTIONING IN SECTION 56 THAT `GO ODWILL IS ONE OF THE INTANGIBLE ASSETS AND THEN EXPLANATION (II) BELOW S ECTION 92B(2) DEFINING THE EXPRESSION 'INTANGIBLE PROPERTY' AS INCLUDING (J) `GOODWILL RELATED INTANGIBLE ASSETS, SUCH AS, INSTITUTIONAL GOODWILL , PROFESSIONAL PRACTICE GOODWILL, PERSONAL GOODWILL OF PROFESSIONAL, CELEBR ITY GOODWILL, GENERAL BUSINESS GOING CONCERN VALUE. THE ABOVE REFERENCES SIMPLY SHOW THAT THE TERM `GOODWILL HAS NOT BEEN DIRECTLY AND PROPERLY DEFINED IN THE ACT EXCEPT POINTING OUT THAT IS AN `INTANGIBLE ASSET. AS SUCH, WE NEED TO DIVE DEEP TO PULL OUT THE TRUE CONNOTATION OF THIS TERM. THE HONBLE SUPREME COURT IN CIT VS. B.C.SRINIVASA SETTY (1981) 128 ITR 294 (SC ) HAS ITA NO.1615/DEL/2008 42 ELABORATED EXPLAINED THIS CONCEPT BY LAYING DOWN TH AT : `A VARIETY OF ELEMENTS GO INTO ITS MAKING, AND ITS COMPOSITION VA RIES IN DIFFERENT TRADES .. AND YET, BECAUSE OF ITS INTANGIBLE NATURE, IT R EMAINS INSUBSTANTIAL IN FORM AND NEBULOUS IN CHARACTER.. IN A PROGRESSING BUSINESS GOODWILL TENDS TO SHOW PROGRESSIVE INCREASE. AND IN A FAILIN G BUSINESS IT MAY BEGIN TO WANE. . IT IS AFFECTED BY EVERYTHING RELATING T O THE BUSINESS, THE PERSONALITY AND BUSINESS RECTITUDE OF THE OWNERS, T HE NATURE AND CHARACTER OF THE BUSINESS, ITS NAME AND REPUTATION, ITS LOCAT ION, ITS IMPACT ON THE CONTEMPORARY MARKET, THE PREVAILING SOCIO-ECONOMIC ECOLOGY, INTRODUCTION TO OLD CUSTOMERS AND AGREED ABSENCE OF COMPETITION. . IT COMES SILENTLY INTO THE WORLD, UNHERALDED AND UNPRO CLAIMED AND ITS IMPACT MAY NOT BE VISIBLY FELT FOR AN UNDEFINED PER IOD. THE OXFORD DICTIONARY OF LAW 5TH EDITION (2003) DEFINES `GOODW ILL AS : `THE ADVANTAGE ARISING FROM THE REPUTATION AND TRADE CON NECTIONS OF A BUSINESS, IN PARTICULAR THE LIKELIHOOD THAT EXISTING CUSTOMER S WILL CONTINUE TO PATRONIZE IT. ITA NO.1615/DEL/2008 43 22.2. IN COMMON PARLANCE AND WITH THE ASSISTANCE FROM THE ABOVE MATERIAL, THE TERM GOODWILL CAN BE LOOSELY CONSTR UED AS INCLUDING BUT NOT RESTRICTED TO A REPUTATION OR A NAME WHICH AN E NTERPRISE MAKES AND ENJOYS FROM THE CUMULATIVE EFFECT OF VARIOUS FACTOR S OVER A PERIOD OF TIME, SUCH AS, ITS BUSINESS DEALINGS WITH CUSTOMERS AND S UPPLIERS, ITS AFTER-SALE SERVICES, ITS BUSINESS SET-UP, ITS PATENTS, ITS TRA DEMARKS, QUALITY OF ITS PRODUCTS ETC. ETC. TO PUT IT SIMPLY, GOODWILL IS A SUBJECTIVE THING REFLECTING THE CREDIBILITY OF AN ENTERPRISE. EACH OF THE ABOVE FACTORS ALONG WITH A HOST OF OTHERS, WHICH ALBEIT CONTRIBUT E TO THE MAKING OF GOODWILL, BUT CANNOT INDEPENDENTLY BE CONSTRUED AS GOODWILL IN THEMSELVES. FOR EXAMPLE, IF AN ENTERPRISE TRANSFER S ITS TRADE MARK, THOUGH SUCH TRADE MARK HELPS IN THE CREATION OF GOODWILL, BUT WE CANNOT SAY THAT THE ENTERPRISE HAS TRANSFERRED ITS GOODWILL BY A ME RE TRANSFER OF TRADEMARK. THE LATER IS A DISTINCT INTANGIBLE ASSET . THE EXPRESSION RIGHT TO CARRY ON ANY BUSINESS IS QUITE CLEAR IN ITSELF. 23. WHEN WE LOOK AT THE PREAMBLE PART OF THE AGRE EMENT, IT CAN BE EASILY NOTICED THAT THE ASSESSEE AGREED TO SELL THE SAID BUSINESS AND THE GOODWILL AND OTHER ASSETS THEREOF. THE TERM ASSETS, INTER ALIA, ITA NO.1615/DEL/2008 44 INCLUDES THE `EXCLUSIVE BUSINESS RIGHT. WHEN WE G LANCE AT THE DEFINITION OF THE LATER EXPRESSION, NAMELY, EXCLU SIVE BUSINESS RIGHT, IT TRANSPIRES THAT JVC, FOR THE STATED CONSIDERATION, GOT AN EXCLUSIVE RIGHT: TO REPRESENT ITSELF AS CARRYING ON THE BUSINESS AS SUCCESSOR TO THE UAL INCLUDING ITEMS LISTED UNDER CLAUSES (A) TO (D). T HE FIRST THREE ITEMS FROM (A) TO (C) ARE: ALL RECORDS OF THE BUSINESS INCLUD ING RECORDS OF SUPPLIERS AND CUSTOMERS; THE BENEFIT OF THE CURRENT ORDERS; A ND THE BENEFIT OF ALL BIDS AND PROPOSALS THAT HAVE BEEN MADE BY UAL TO CU STOMERS. THESE ITEMS OBVIOUSLY FALL IN THE CATEGORY OF TRANSFER OF RIGHT TO CARRY ON ANY BUSINESS. THE FOURTH ITEM AT SL. NO. (D) WHICH HA S BEEN TRANSFERRED TO JVC IS: ALL RIGHTS TO THE UILS DISTRIBUTION NETWO RK FOR THE BUSINESS EXCLUDING UILS COMPANY SHOPS. AT THIS JUNCTURE, IT IS PERTINENT TO MENTION THAT THE ASSESSEE, APART FROM CARRYING ON T HE BUSINESS OF AIR- CONDITIONERS AND WATER COOLERS, WAS ALSO ENGAGED IN THE BUSINESS OF FANS, SEWING MACHINES, ETC. BY TRANSFERRING ITS DISTRIBU TION NETWORK FOR THE BUSINESS OF ACS AND WATER COOLERS, AND CONTINUING T O RETAIN IT FOR THE BUSINESS OF FANS AND SEWING MACHINES, THE ASSESSEE, IN FACT, TRANSFERRED TO DAIKIN A PART OF ITS GOODWILL EARNED OVER THE PERIO D WITH SUCH ITA NO.1615/DEL/2008 45 DISTRIBUTORS. WHEN WE CONSIDER THE DEFINITION OF ` EXCLUSIVE BUSINESS RIGHT IN A HOLISTIC MANNER, IT TRANSPIRES THAT THE ASSESSEE NOT ONLY TRANSFERRED RECORDS AND BENEFIT OF ORDERS AND BIDS TO JVC ON ONE HAND, BUT ALSO ` TO REPRESENT ITSELF AS CARRYING ON THE BUSINESS AS SUCCESSOR TO UAL (THE ASSESSEE) AND THE GOODWILL EARNED BY IT OVER THE PERIOD IN I TS DISTRIBUTION NETWORK. THAT APPEARS TO BE THE REASO N FOR WHICH CLAUSE B IN THE PREAMBLE PART OF THE AGREEMENT MENTIONS IN UNAM BIGUOUS TERMS ABOUT THE TRANSFER OF THE SAID BUSINESS AND THE GOODWILL . SIMILAR POSITION FOLLOWS WHEN WE CONSIDER CLAUSE 2 OF THE A GREEMENT WITH THE CAPTION PURCHASE OF ASSETS. SUB-CLAUSE (1) OF TH IS CLAUSE CATEGORICALLY MENTIONS THAT THE ASSESSEE SHALL SELL: THE BUSINESS AS A GOING CONCERN TOGETHER WITH ALL ASSOCIATED GOODWILL AND THE ASSET S FREE FROM ALL ENCUMBRANCES. IN A NUTSHELL, THE AGREEMENT AMPLY DEMONSTRATES T HAT THE ASSESSEE NOT ONLY TRANSFERRED ITS BUSINESS TO DAIKIN, BUT ALSO THE GOODWILL AND THE CONSIDERATION OF RS.1.73 CRORE I S FOR BOTH OF SUCH CAPITAL ASSETS. EX CONSEQUENTI, NEITHER THE VIEW POINT OF THE AUTHORITIES BELOW THAT THE ENTIRE CONSIDERATION WAS FOR THE TRA NSFER OF `GOODWILL ITA NO.1615/DEL/2008 46 MERITS ACCEPTANCE NOR THE CONTENTION OF THE ASSESSE E THAT IT WAS FOR THE TRANSFER OF `BUSINESS IS SUSTAINABLE. 24. IT HAS BEEN NOTICED ABOVE THAT `GOODWILL HAV ING NIL COST OF ACQUISITION WAS INSERTED IN SECTION 55(2) W.E.F. TH E ASSESSMENT YEAR 1995- 96 AND THE `RIGHT TO CARRY ON ANY BUSINESS HAVING NIL COST OF ACQUISITION W.E.F. THE ASSESSMENT YEAR 2003-04. THERE CANNOT BE ANY RETROSPECTIVE OPERATION OF THE LATTER INSERTION, AS IT CASTS A FR ESH AND AN ADDITIONAL TAX LIABILITY. AS THE ASSESSMENT YEAR UNDER CONSIDERAT ION IS 2001-02, THERE CAN BE NO QUESTION OF COMPUTATION OF CAPITAL GAIN O N THE TRANSFER OF RIGHT TO CARRY ON ANY BUSINESS DURING THE YEAR IN QUESTION. AT THE SAME TIME, THE TRANSFER OF `GOODWILL WITH NIL COST OF A CQUISITION TO THE ASSESSEE WILL RIGHTLY TRIGGER THE PROVISION OF SECT ION 45(1) OF THE ACT. SINCE THE AUTHORITIES BELOW HAVE TREATED THE ENTIRE AMOUNT OF RS.1.73 CRORE AS A CONSIDERATION FOR THE TRANSFER OF `GOODW ILL, WE CANNOT UPHOLD THE SAME. THE IMPUGNED ORDER ON THIS SCORE IS SET ASIDE AND THE MATTER IS REMITTED TO THE AO FOR BIFURCATING THE CONSIDERATIO N FOR TRANSFER OF `GOODWILL AND FOR TRANSFER OF `RIGHT TO CARRY ON B USINESS IN SOME REASONABLE AND JUSTIFIABLE MANNER. THE PART OF THE CONSIDERATION RELATING ITA NO.1615/DEL/2008 47 TO TRANSFER OF `GOODWILL WOULD ATTRACT TAXABILITY U/S 45(1) AND THE OTHER PART WOULD ESCAPE THE TAXATION NET BECAUSE OF THE ABSENCE OF COST OF ACQUISITION AND THE RESULTANT IMPOSSIBILITY OF COMP UTATION OF CAPITAL GAIN IN TERMS OF THE JUDGMENT IN B.C. SRINIVASA SHETTY (SUPRA) . NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPO RTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR ST ATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 09.03.201 5. SD/- SD/- [I.C. SUDHIR] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 09 TH MARCH, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.