Judgment:
1. The assessee is the appellant in this appeal. The appeal is preferred against the order of the CIT(A) dt. 10th May, 2001, in No.222/2000-01 and it relates to asst. yr. 1990-91.
2. There is a delay of 18 days in filing the above appeal. The reasons for the delay is stated by the assessee in his application as owing to an application dt. 14th June, 2001, filed before the CIT(A) under Section 154 of the IT Act, 1961, seeking to rectify errors apparent on the face of the record of his order dt. 10th May, 2001. It is stated by the assessee that there was no adjudication till date on his application. The assessee by way of abundant caution had also filed the present appeal. This was stated as the reason for the delay.
Considering the facts as stated by the learned counsel for the assessee and considering the fact that the delay is of 18 days we are inclined to condone the delay in filing the appeal. The assessee should not be denied opportunity of his remedy by way of appeal on mere technicalities. The delay in our view is not wilful nor is the delay inordinate. In the interest of justice the delay in filing the appeal deserves to be condoned and is accordingly condoned.
3. The assessee is a registered firm deriving income from trading in Tendu leaves. For the asst. yr. 1990-91, the assessment was completed under Section 143(3) of the Act on 18th Sept., 1992. The firm was dissolved on 31st March, 1990. One of the partners Shri Ramlal Agrawal took over the business and carried on the same in the same old name as proprietor. At the time of the original assessment proceedings, the AO had duly recorded the fact of the dissolution of the firm and taking over of the business by one of the partner. Subsequently, audit objection was raised to the effect that there was a transfer of goodwill of the firm to one of its partners on dissolution and thus, the capital gain arising out of the transfer of goodwill is liable to be taxed under Section 45(4) of the Act. Based on this audit objection, a notice under Section 147 was issued to the assessee. In response to which, the assessee filed the return of income showing the total income as determined in proceedings under Section 143(3) as modified by the appellate authority in those proceedings. In the course of the reassessment proceedings, the assessee submitted that the nature of the business was such that there cannot be any goodwill which the firm possessed which it had transferred to the individual partner. Apart from this, reopening was also challenged on the ground that the AO had knowledge of the dissolution of the firm at the time of the original assessment and was of the opinion that there could be no goodwill on the dissolution of the firm and the proceedings under Section 147, are only on a change of opinion. The AO rejected this contention. The CIT(A) confirmed the order of the AO.4. Aggrieved by the order of the CIT(A) the assessee has preferred the present appeal. The 1st ground of appeal of the assessee is general in nature and does not deserve any separate consideration. The 2nd ground of appeal of the assessee reads as follows: "On the facts and in the circumstance of the case, the learned CIT(A) further erred in confirming the action taken by the learned AO under Section 147 for reopening of the assessment. " 5. The learned counsel for the assessee brought to our notice the original order of assessment under Section 143(3) in this case wherein the AO has acknowledged the intimation by the assessee under Section 176(3) of the IT Act, 1961, the fact of dissolution of the firm. He further drew our attention to the fact that all assets and liabilities of the firm were being taken over by one of the partner Sri Ramlal Agarwal and continuing the business as sole proprietor is also well within the knowledge of the AO and the same has been referred to in the original order of assessment. He also drew our attention to the fact that the question of valuation assets of the partnership firm for the purpose of winding up after the dissolution was in dispute before the AO in the assessment proceedings. It was submitted by the learned counsel for the assessee that the assessee has disclosed fully and truly all material facts necessary for his assessment. The AO has not considered the firm as having an intangible asset in the form of goodwill and did not chose to make any addition. In such a situation he submitted that the action of the AO in initiating proceedings under Section 147 is not in accordance with law. He submitted that there should be finality to assessment proceedings and the only way by which an assessment can be reopened is on the belief of the AO that there has been escapement of income assessable to tax. The belief of the AO that there has been escapement of income has to be on new information and not a mere change of opinion on the same set of facts. In this connection he relied on the decision of the Honourable Supreme Court in the case of Associated Stone Industries (Kotah) Ltd. v. CIT (2997) 224 ITR 560 (SC), the Honourable Delhi High Court in the case of Jindal Photo Films v. Dy. CIT (1998) 234 ITR 170 (Del), the decision reported in CIT v. Rajalakshmi Textile Processors Ltd. (1999) 235 ITR 718 (Mad), 234 ITR 117 (sic), Parashuram Pottery Works Co. Ltd. v. ITO (1977) 106 ITR 1 (SC), S. Harinivas Choudhary v. Asst. CIT (2000) 246 ITR 256 (Mad) and Needle Industries (I) Ltd v. CIT (1990) 183 ITR 393 (Mad).
6. He also submitted that the entire basis of reopening was on the report of the audit party. His submission in this regard is that the audit party had interpreted the provisions of applicability of Section 45 (4) of the IT Act, 1961, to the case of the assessee. Such information based on which assessment was reopened was not a valid information on the basis of which the AO should have reinitiated the reassessment. According to him the satisfaction of the AO is sine quo non and not the satisfaction of the audit party. In this connection he relied on the decision of the Honourable Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC).
7. The learned Departmental Representative, on the other hand submitted that the provisions for reassessment have undergone a change from 1st April, 1989, and the only requirement of the law now is that the AO should have reason to believe that income chargeable to tax has escaped assessment. He further submitted that the case laws cited by the learned counsel for the assessee are on the interpretation of the law as it stood prior to amendment w.e.f. 1st April, 1989, and are not applicable to the facts oi the present case which relate to asst. yr.
1990-91. He further submitted that the fact that in the original assessment the AO had knowledge of the fact of dissolution alone is not sufficient to hold that there has been application of mind by the AO on the question of liability to assessment of goodwill on dissolution of the firm. He further submitted that the fact that the firm earned profits in the earlier years is enough to conclude that it possessed goodwill. It's non-consideration in the original assessment has lead to reassessment proceedings and the assessee cannot have any grievance. On the merits of the evaluation of goodwill he relied on the orders of the Revenue authorities.
8. We have considered the rival submissions. The provisions of Section 147 as amended by the Finance Act, 1987, w.e.f 1st April, 1989 reads as follows: "147 Income escaping assessment.--if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and Which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
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.
Explanation 2 : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely : (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (iii) such income has been made the subject of excessive relief under this Act; (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed," 9. It is pertinent to note that Section 147 was substituted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989 and as per the amended provisions of the said section the only condition precedent for acquiring jurisdiction under Section 147 is that the AO should have reason to believe that income chargeable to tax has escaped assessment. It is thus clear that the requirements in the old provisions that the AO should have "information in possession" before taking action to assess or reassess the income escaping assessment have been dispensed with and the only requirement for reopening the assessment within a period of four years from the end of the relevant assessment year is that the AO should have reason to believe that the income chargeable to tax has escaped assessment.
10. The various case laws relied upon by the learned counsel for the assessee are relating to the pre amended provisions of Section 147 and goes to show that the information ,was the basis for forming belief about the escapement as per the pre-amended provisions and the AO was required to have such information in his possession to enable him to validly acquire the jurisdiction under Section 147 and in the absence of the very existence of such information, the various judicial authorities proceeded to conclude that the AO did not have jurisdiction to assess or reassess the income of the assessee under Section 147.
11. After the amendments made to Section 147 w.e.f. 1st April, 1989, the condition precedent is only that the AO should have reason to believe that income chargeable to tax has escaped assessment. In the present case, the reason to entertain belief about the escapement of income as the non-consideration of an element of transfer of goodwill in the process of dissolution of firm and consequent takeover of it's business by one of it's partner as sole proprietor. The basis on which the AO entertained such a belief is the note of the audit party.
Therefore, it cannot be said that there was no reason to believe on the part of the AO that the income liable to tax has escaped assessment.
12. We however find that the assessment in the present case relates to asst. yr. 1990-91. For reopening of the above assessment within a period of 4 years from the last day of the assessment year it is enough if the AO has 'reason to believe that income liable to tax has escaped assessment'. Admittedly in the present case the reopening of the assessment under Section 147 was sought to be made by issue of a notice under Section 148, dt. 11th Jan., 1999, which period is beyond 4 years from the end of the relevant assessment year. For reopening a completed assessment beyond this period of 4 years, however, the condition is that there should be failure to file return of income or to disclose fully and truly all material facts necessary for his assessment for that assessment year. What is failure to disclose fully and truly all material facts necessary for an assessment is laid down by Expln. 1 which reads as follows: "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." 13. In the present case the assessee had disclosed the fact of dissolution of the firm and the AO in the original assessment had disputed the valuation of assets on dissolution. The AO in our view did not think fit or did not consider in the original assessment that the firm possessed any goodwill which it had transferred to the person who took over the business of the firm. As per the proviso to Section 147 substituted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, where an assessment has been made under Section 143(3), the same cannot be reopened under Section 147 after the expiry of four years from the end of the relevant assessment years unless there is a reason to believe that any income chargeable to tax has escaped assessment for such assessment year by reason of the assessee's failure to make a return under Section 139 or in response to a notice issued under Section 142(1) or 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the present case, there is not even a reference that the reopening is done owing to failure on the part of the assessee to fully and truly disclose material facts relating to his assessment. The Honourable Supreme Court made the following observations regarding what is omission to disclose fully and truly all material facts in the case of Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC) : "The words used 'are omission or failure to disclose fully and truly all material facts necessary for his assessment for that year.' It postulates a duty of every assessee to disclose fully and truly all material facts necessary for assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceedings, 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 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 facts disclosed, or otherwise, the assessing authority has to draw inference 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 and ascertain on the correct interpretation of the taxing enactment, the proper tax leviable." After referring to the aforesaid observations, the Honourable Supreme Court proceeded to hold that the finality of proceeding is certainly a consideration but that avails one who has fully and truly disclose all material facts necessary for his assessment for that year and not to others.
14. From the perusal of aforesaid observations of the Hon'ble Supreme Court, it is clear that the assessee is required to place before the AO all the primary facts necessary for his assessment and once that is done the assessee can be said to have discharged his obligation in this regard In the present case, as already mentioned, the assessee had disclosed the factum of dissolution of the firm. Even in the reassessment proceedings the claim of the Revenue is that there is deemed transfer of goodwill which the firm possessed and which it transferred to the sole proprietor. According to the assessee the firm never possessed any goodwill which it was capable of transferring. As a matter of fact, on the basis of disclosure made by the assessee in its return of income, the AO completed the assessment originally under Section 143(3). It is thus clear that there was no escapement of income on this count for the reason of failure on the part of the assessee to disclose truly and fully all the material facts so as to confer jurisdiction to the AO to reopen the assessment by issuing notice under Section 148 beyond the period of four years from the end of the relevant assessment year. As such, considering all the facts of the case and keeping in view the aforesaid judicial pronouncements, we hold that the notice issued by the AO under Section 148 for reopening the assessment for asst. yr. 1989-90 was issued by the AO beyond the period prescribed in Section 147 and the same being barred by limitation the reassessment proceedings under Section 147 is liable to be quashed.
15. Though the assessee has not raised this plea in a specific form yet we are of the view that the challenge to the entire reassessment proceedings is enough for us to adjudicate on the validity of reopening on this ground. We wish to refer to the decision of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) wherein the Honourable Supreme Court held that there is no reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of CIT(A). It held that the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. It also held that the Tribunal should not be prevented from considering questions of law arising in assessment proceedings although not raised earlier. If, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. There is no reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. Tribunal should not be prevented from considering questions of law arising in assessment proceedings although not raised earlier. The following decisions were applied and others overruled: Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC) applied; CIT v. Anand Prasad (1981) 128 ITR 388 (Del), CIT v. Karamchand Premchand (P) Ltd. (1969) 74 ITR 254 (Guj) and CIT v. Cellulose Products of India Ltd. (1985) 151 ITR 499 (Guj)(FB) overruled. Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings such a question should be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
"Alternatively, on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the addition of Rs. 1,54,980 on account of estimation of goodwill of dissolved firm as made by the AO which is highly unjustified and arbitrary as the dissolved firm has never possessed such goodwill looking to its nature of business." 18. The assessee contended before the AO that the firm was engaged in the business of trading in Tendu leaves. The assessee used to submit tenders and participate in auctions to buy lots of Tendu leaves from the State Government. The quality of the leaves and it's saleability depends on the lot that the firm is allotted in the event of their tender being accepted. The customers ultimately purchase only on the basis of the quality of the leaves. According to the assessee the quality which is the main factor in the assessee's business is beyond it's control and as such the firm never possessed any goodwill. The AO however, held that there is an element of transfer of goodwill in the dissolution of the firm and take over of the business by the firm by one of it's partner as sole proprietor and computed the value of goodwill by adopting the super profits method. The CIT(A) concurred with the view of the AO holding that the provision of the law on this aspect was very clear.
19. Before us the learned counsel for the assessee while reiterating his submissions as before the Revenue authorities brought to our notice the definition of goodwill as laid down in the following judicial pronouncements, CIT v. Mohanbhal Pamabhai (1973) 91 ITR 393 (Guj), CIT v. Kamlini Gautam Sarabhai (1994) 208 ITR 139 (Guj), Jogta Coal Co.
Ltd. v. CIT (1959) 36 ITR 521 (SC), Smt. Shrimbayi Ammal v. CED (1976) 103 ITR 358 (Mad), Seethalakshmi Ammal v. CED (1966).61 ITR 317 (SC).
We deem it proper to refer to one of judgments of the Hon'ble Supreme Court in Seethalakshmi v. CED (supra) which would be relevant to the issue in the present case.
"It is one of those terms which is better understood than comprehensively and clearly described. Broadly speaking, it is the magnetic quality of a particular trade or business which attracts customer to it as a matter of course. This quality springs from and is developed by various contributing factors that earn a reputation for honest dealing, quality and standard. Goodwill is found on the belief and faith of the customer. Where a business involves no distinguishable features and deals in standard articles manufactured by someone else which one can get from everywhere, not merely from a particular dealer, there is hardly possibility of there being a goodwill attached to such business".
It was further submitted by the learned counsel for the assessee that Tendu leaves' being a natural forest product and it's quality being the prime consideration for saleability in the market which factor was beyond the control of the assessee, it cannot be said that the assessee possessed any goodwill which ,it was capable of transferring to the sole proprietor. He submitted that there is no brand name in this line of business. As a matter of fact it was submitted that the sole proprietor suffered losses for asst. yrs. 1991-92, 1992-93 and the loss was determined in assessment proceedings under Section 143(3). It was also submitted that the assessee has now changed his line of business into that of rice.
20. The learned Departmental Representative on the other hand submitted that the firm derived profits from it's business and the fact that the said business was being transferred to one of the partners is enough to hold that there was an element of goodwill which the firm possessed and which it transferred to the sole proprietor. He submitted that the provisions of Section 45(4) of the Act clearly enable the Revenue to tax the capital gain arising on transfer of the business. The fact that the sole proprietor after takeover of the business of the firm suffered losses or abandoned this line of business is not relevant apart from lack of proof in support of such a claim. He submitted that the order of the Revenue authorities does not call for any interference and prayed that the appeal of the assessee be dismissed., 21. In view of our decision that the reopening of assessment is not valid, we deem it unnecessary to decide this issue. Considering the rival submissions, we are of the view that the assessee should succeed on this ground also. In the light of the assertion that there has been no transfer of goodwill, even assuming that the firm possessed goodwill which it was capable of transferring, we fail to see how it could come within the purview of Section 45(4). If no consideration has been received by the assessee then it would be outside the ambit of income in the absence of any other deeming provision.
22. In the absence of a finding that the firm has received consideration in respect of the alleged transfer of goodwill we fail to see how the order of assessment can be sustained, Thus we are of the view that the very basis of levy of capital gains tax on the alleged transfer of goodwill is legally not sustainable.
23. The 4 and 5 grounds of appeal are not pressed by the learned counsel for the assessee and as such they are dismissed as not pressed.