1. These four appeals and cross-objection have been filed by the assessee and the revenue against the separate orders of Commissioner (Appeals) - XII, Mumbai for the assessment years 1997-98 to 1999-2000 against the orders under Section 143(3) of the Income Tax Act, which are as under:ITA/CO No. Appeal filed by Assessment year Commissioner (Appeals)ITA No. 4807/Mum./02 Assessee 1997-98 17-7-2002ITA No. 5368/Mum./02 Revenue 1997-98 17-7-2002ITA No. 308/Mum./03 Revenue 1998-99 4-10-2002ITA No. 309/Mum./03 Revenue 1999-2000 4-10-2002CO No. 44/Mum/2004 Assessee 1999-2000 4-10-2002 The abovesaid four appeals and cross-objection filed by the revenue and the assessee were heard together and are being disposed off by this consolidated order for the sake of convenience.
1. On the facts and in the circumstances of the case the learned Commissioner (Appeals) erred in deleting the addition on account of cash expenses to the extent of Rs. 40,19,879 without appreciating the fact that the assessee has not proved that the expenses were incurred wholly and exclusively for the purposes of business either before assessing officer or before Commissioner (Appeals).
2. Without prejudice to Gr. No. 1, the learned Commissioner (Appeals) erred in restricting the addition to Rs. 4,14,490 in spite of holding in para 6.5 of his order that it would be difficult to conclude that these expenses were incurred wholly and exclusively for the purposes of business.
1. On the facts and in the circumstances of the case the learned Commissioner (Appeals) erred in law in deleting the addition of Rs. 4,00,000 on account of labour stitcher and coolie charges and Rs. 4,00,000 on account of boat, transport and other miscellaneous expenses.
1 b. While doing so he has not obtained any satisfactory evidence on record to hold that entire expenses claimed by the assessee was allowable.
1. The learned Commissioner (Appeals) erred on facts and in law, in confirming the disallowance of Rs. 4,14,490.
2. The learned Commissioner (Appeals) further erred holding that Rs. 4,14,490 was undisclosed income of the appellant, while confirming the disallowance made by the assessing officer.
3. The learned Commissioner (Appeals) further erred on facts and in law confirming disallowance of Rs. 4,14,490 by way of undisclosed income on estimated basis by reding on the ratio of net profit as a percentage of gross receipt of earlier year/subsequent year.
4. Having found no complicity on the part of the appellant, the learned Commissioner (Appeals) further erred in confirming addition of Rs. 4,14,490.
4. Mr. M.B. Reddy, Departmental Representative appeared for revenue and Mr. F.V. Irani, learned Counsel appeared for the assessee and put forward their contentions.
5. The brief facts of the case are that the survey operations were carried out at the premises of the assessee under Section 133A of the Income-tax Act on 5-11-1998. Certain documents/papers were seized during the course of survey operation. All the said documents /papers related to assessment year 1996-97 and when confronted the assessee surrendered a sum of Rs. 12 lakhs on account of expenses like labour stitcher, boat hire and transport charges and various other miscellaneous expenses. The assessee is carrying on the business of Clearing and Forwarding Agents and it was admitted by the assessee that certain vouchers for expenses are not supported by third party evidence. Accordingly, a sum of Rs. 12 lakhs was offered as additional income for the assessment year 1996-97 and the same was accepted by the assessing officer vide order under Section 143(3) of the Income Tax Act.
6. The assessee had made similar declaration on account of expenses in assessment year 1997-98 amounting to Rs. 10 lakhs and in assessment year 1998-99 amounting to Rs. 8 lakhs. The assessing officer issued notice under Section 148 of the Income Tax Act and in response to the said notice under Section 148 of the Act, the additional income offered during the course of recording of statement under Section 133A of the Act was not included in the Return of Income for both the years i.e., assessment years 1997-98 and 1998-99. The assessing officer during the course of assessment disallowed 50 per cent of expenses on account of labour charges, female coolie charges, stitcher charges and miscellaneous expenses totalling Rs. 88,68,738 on estimate basis as the assessee had failed to furnish documentary evidence apart from the self-made vouchers. The assessing officer also relied on the disclosure made by the assessee in assessment year 1996-97 as the basis for making disallowance of Rs. 44,34,369 being 50 per cent of total expenditure of Rs. 88,68,738 in assessment year 1997-98.
7. Similarly, the assessing officer disallowed Rs. 8 lakhs in accordance with the disclosure made by the assessee during the course of survey being Rs. 4 lakhs out of labour, stitcher and female coolie charges and Rs. 4 lakhs out of boat transport and other miscellaneous expenses in assessment year 1998-99.
8. Before the Commissioner (Appeals), it was pleaded by the learned authorised representative for the assessee that the disclosure of additional income of Rs. 10 lakhs/Rs. 8 lakhs for assessment years 1997-98 and 1998-99 were made under pressure and the same cannot be the basis for making the addition as no discrepancy was found in the vouchers maintained by the assessee for the abovesaid years. The assessee further explained that the proof in support of cash expenses incurred by way of independent evidence was also submitted before the assessing officer and further explanation along with documentary evidence was filed before the Commissioner (Appeals). The Commissioner (Appeals) on comparison of the net profit rates declared by the assessee in assessment years 1996-97,1997-98 and 1998-99 observed as under: ...the non-business expenses can well be estimated by taking income at an amount which would give same percentage to the gross receipts as in assessment year 1998-99. If this is done, the percentage would be the same for assessment year 1998-99 and would almost be the same as in assessment year 1996-97 arrived at after including the amount of Rs. 12,00,000 surrendered in assessment year 1996-97. The gross receipts in assessment year 1997-98 are Rs. 229 lakhs. The difference of 4.90 per cent and 3.09 per cent, which are the ratios of figure to gross receipts in the two years, which applied to gross receipts of Rs. 229 lakhs yields Rs. 4,14,490. In view of this, the addition by way of undisclosed income gets reduced to Rs. 4,14,490 and the appellant gets part relief in regard to ground No. 2.
9. Accordingly, as against the addition of Rs. 44,34,369 made by the assessing officer, the Commissioner (Appeals) confirmed the addition of Rs. 4,14,490 in assessment year 1997-98. The assessee in his appeal has raised several grounds of appeal but all against the addition of Rs. 4,14,490. The grievance of the revenue is against the deletion of addition on account of cash expenses to the extent of Rs. 40,19,879.
10. In assessment year 1998-99, the Commissioner (Appeals) applying the same ratio observed that without any evidence on record to establish the non-genuineness of expenses, there is no merit in the addition of Rs. 8 lakhs. The said addition of Rs. 8 lakhs was thus deleted by Commissioner (Appeals). Revenue is aggrieved and has raised the issue of deletion of addition of Rs. 8 lakhs in its appeal filed against the order of Commissioner (Appeals).
11. The learned authorised representative for the assessee drew our attention to the comparative rates of Gross Receipts and Net Profits for the years under consideration, copy of which is filed at page 90 of the paper book. The comparative figures of gross receipts and net profit are as under:Net Profit before Depreciation, Rs. 3.75 Rs. 7.07 Rs. 8.48Interest and Tax (in lakhs) The learned authorised representative for the assessee pointed out that after inclusion of the additional income of Rs. 12 lakhs in assessment year 1996-97, the net profit rate works to 4.89 per cent. The learned authorised representative, further pointed out that in case the additional income of Rs. 10 lakhs is included in assessment year 1997-98,the net profit rate would works out to 7.45 per cent and on inclusion of Rs. 8 lakhs in assessment year 1998-99, the net profit rate would be 15.36 per cent. The learned Departmental Representative placed strong reliance on the order of assessing officer and also the additional income offered by the assessee during the course of recording of statement in survey proceedings.
12. We have heard the rival submissions and perused the records. The sole basis for making the addition in assessment years 1997-98 and 1998-99 are the additional income offered and accepted in assessment year 1996-97.The basis for offering and acceptance of additional income in assessment year 1996-97 were the vouchers found during the course of survey conducted at the premises of assessee on 5-11-1998, which negativated the claim of expenses in the said year. No such vouchers were found in respect of assessment years 1997-98 arid 1998-99, though survey was carried out at the premises of the assessee on 5-11-1998.
During the course of assessment proceedings also the assessing officer had failed to bring on record any documentary evidence to prove the non-genuineness of the expenses claimed to be incurred by the assessee during the course of carrying on of its business.
13. The assessee is carrying on the business of Clearing and Forwarding Agent and it is an accepted practice that certain vouchers for expenses are not supported by third party evidence, in view of the nature of work undertaken by the assessee, where labour oriented jobs are carried on. From the perusal of the comparative statement of gross receipts and net profit as reproduced hereinabove, we find that the gross receipts of the assessee have fallen from the assessment years 1996-97 to 1998-99, i.e., as against the receipts of Rs. 418.43 lakhs in assessment year 1996-97, total receipts in assessment year 1997-98 were Rs. 229 lakhs and Rs. 76.46 lakhs in assessment year 1998-99. As against the fall in business, the assessee had shown increase in net profit rate of 3.09 per cent in assessment year 1997-98 and 4.9 per cent in assessment year 1998-99 as against 2.03 per cent declared in assessment year 1996-97. Even after including the additional income of Rs. 12 lakhs declared in assessment year 1996-97, the net profit rate works out to 4.89 per cent.
14. We find merit in the order of Commissioner (Appeals), wherein he had confirmed the addition of Rs. 4,14,490 in assessment year 1997-98 and deleted the addition of Rs. 8 lakhs in assessment year 1998-99 by applying the net profit rate of assessment year 1996-97. In the facts and circumstances of the case, where during the course of survey no documentary evidence was found in respect of non-genuineness of expenses incurred during the assessment years 1997-98 and 1998-99, there is no merit in the addition of additional income offered during the survey proceedings. We confirm the order of Commissioner(Appeals) in upholding the addition of Rs. 4,14,490 in assessment year 1997-98 and deleting the addition in assessment year 1998-99. Accordingly, the grounds of appeal raised by the assessee in assessment year 1997-98 are dismissed and the grounds of appeal raised by the revenue in assessment years 1997-98 and 1998-99 are also dismissed.
CO No. 44/Mum./2004 : assessment year 1999-2000 (Assessee's cross-objection): 1. On the facts and in the circumstances of the case the learned Commissioner (Appeals) erred both in law in deleting the addition of Rs. 25,00,000 on account of goodwill and Rs. 20,00,000 on account of bills receivable overlooking the answer to question No. 9 that the books of account were not prepared till the date of survey.
1. The learned Commissioner (Appeals) erred on facts and in law in confirming the action of the assessing officer disallowing Rs. 31,025, being sundry debit balances written off, when above advances were given in the regular course of business and, therefore, should be allowed as deduction under Section 37 of the Act.
16. The learned authorised representative for the assessee at the outset stated that they are not pressing the ground raised in cross-objection filed by the assessee. Accordingly, the cross-objection filed by the assessee is dismissed as not pressed.
17. Now, coming to the appeal of the revenue with regard to deletion of addition on account of goodwill of Rs. 25 lakhs and Rs. 20 lakhs on account of bills receivable.
18. The brief facts of the case are that during the course of survey on 5-11-1998, statement of Mr. Rajesh Bahl was recorded and in answer to question No. 7, he made a disclosure of Rs. 25 lakhs on account of good will and in answer to question No. 10, he made a disclosure of Rs. 20 lakhs on account of bills receivable. Further disclosure of Rs. 7.50 lakhs was made on account of tarpaulins sale and Rs. 17.50 lakhs on account of sale of gunny bags. The assessee had included the income on sale of gunny bags and tarpaulins amounting to aggregate of Rs. 25 lakhs in the Return of Income for the year under consideration, but had not declared the income on account of bills receivable amounting to Rs. 20 lakhs and goodwill of Rs. 25 lakhs while filing the Return of Income for the year under consideration.
19. The assessee had annexed the following note along with the computation of income: 1. Included in Annexed Accounts as on 31-3-1999 is Sales of Gunny Bags and Tarpaulin as mentioned in I/Tax Survey Report of 5/6-11-1993.
2.Firms has received Rs. 50,000 dues towards outstanding Debtors,and same will be accounted in financial year 1999-2000 relevant assessment year 2000-01. Of the remaining debts there is litigation going in court in Kakinada and chances of recovery depends on our judgment in Kakinada.
3. Firms has not received any monies towards goodwill. Business conditions are bad in Kakinada as far as Agricultural exports from Kakinada Port are concerned. Hence though the goodwill amountas mentioned in Income Tax Survey Report of Income Tax Department under Section 133A. No amount has been received towards goodwill after 31-3-1999 and thereafter till today. No debit note have been raisedand have there is no question of goodwill.
As nothing is received, Income from Goodwill is not Reported as Firm is following Cash System of Accounting.
20. The assessing officer requisitioned the assessee why the said sum of Rs. 20 lakhs on account of bills receivable and goodwill of Rs. 25 lakhs declared during the course of survey was not offered for taxation. In reply, the assessee explained that the assessee was following cash system of accounting and as the assessee had not received the aforesaid amounts during the year under consideration, the same were not included as income for the year. It was also explained by the assessee that no amount was received towards goodwill account due to bad market/business conditions at Kakinada and the same was also not provided for in the books of account of M/s. Sarnta Services (Kakinada) (P) Ltd. It is also stated by the assessee that the offer was made during the course of survey only subject to the condition that the income from bills receivable shall be included, if realized during the year. As the assessee was following cash system of accounting, no amount could be brought to tax unless the same is received during the year under consideration. The assessing officer in para 5.2 at page 6 categorically observed that 'as regards goodwill of Rs. 25 lakhs, it is a fact that the decision of receiving goodwill was taken and the business had also been transferred to M/s. Samta Services (Kakinada) (P.) Ltd.' The assessing officer included the said sum of Rs. 25 lakhs on account of goodwill as according to the assessing officer the relevant entries were not passed in the books of account by the assessee in connivance with its sister-concern. The addition on account of bills receivable amounting to Rs. 20 lakhs was also made by the assessing officer as the same was declared as additional income by the assessee during the course of survey.
21. The Commissioner (Appeals) deleted both the additions on account of bills receivable and goodwill as the assessee had not received the said amounts and since there is no doubt that the assessee was following cash system of accounting, the same cannot be included in the income of the assessee, during the year under consideration. The Commissioner (Appeals) further observed that the statement recorded under Section 133A of the Act has limited utility and does not constitute evidence and in any case the statement in question was retracted subsequently by the assessee. As the addition was made without any corroborative evidence found, the said additions were deleted by the Commissioner (Appeals).
22. The learned Departmental Representative placing reliance on the order of assessing officer drew our attention to the statement recorded during the course of survey. The learned authorised representative for the assessee stressed that since inception of firm, assesseewas following cash system of accounting, and the said amount on accountof goodwill amounting to Rs. 25 lakhs and bills receivable totalling toRs. 20 lakhs were not received during the year under consideration. The learned authorised representative further pointed out that the said non-receipt of goodwill and bills receivable has been accepted by the assessing officer and in view thereof there is no merit in including the same. On query from the Bench, it was stated by the learned authorised representative for the assessee that the business of the Partnership has not been taken over by the Private Limited Company.
23. We have heard the rival submissions and perused the records. Survey operations were carried out at the premises of the assessee on 5-11-1998 and a diary marked as 'A-5' was found during the course of survey. The statement of Mr. Rajesh Bahl was recorded, during the course of survey proceedings on 5-11-1998. The said diary was confronted to the assessee as per question No. 6, which is as under along with the answer to the said question.
Q. 6.1 am showing you a diary (Creart) marked A-% as per the inventory of books of account found during the course of survey. You are requestedto go through the same and explain the contents of the same? Ans. This diary consists of business planning and strategy as discussed and decided by us. The contents are written by me in my handwriting.
24. The assessee was further requisitioned to explain the contents written on pages 65,66 and 67 in detail, as per question No. 7 raised and the answer to the said question is as under: Q. 7. Please explain the contents written in pages 65, 66 and 67 in detail? Ans. These pages pertain to the business decision regarding M/s.
Samta Marine Kakinada and M/s. Samta Marine Kandla. The details are as under: Page No. 65: This is regarding the firm of M/s. Samta Marine Kakinada. As per the decision arrived at after discussion with my brother Shri Rajiv and the partner, Mrs. Salma Jayraj (Mr. Mair) the business of M/s. Samta Marine Kakinada was transferred to the Pvt.
Ltd. Co., viz, M/s. Samta Services (Kakinada) Pvt. Ltd. It was mutually decided that the firm would receive an amount of Rs. 25 lakhs as goodwill. The stocks of gunny bags and tarpaulin was decided to be disposed of. Page No. 66: This page reflects the sales of the stocks of gunny bags and tarpaulins lying at Kakinada as decided earlier. The receipts are in lakhs. For examples May 10 - 1.5 implies receipt of cash Rs. 1,50,000 on 10th of May from Kakinada. The total receipts on account of gunny bags comes to Rs. 17,50,000 and that of Tarpaulins comes to Rs. 7,50,000. These materials have been accumulated over past few years and they belong to the various parties and also the firm. Since the above sales is not entered in the books, it constitutes the income of the firm of M/s. Samta Marine Kakinada for the financial year 1998-99 and is being of f ered as additional income over and above the regular income, if any, for the financial year 1998-99 relevant to assessment year 1999-2000.
Page No. 67: This page pertains to sale of gunny bags by the firm M/s. Samta Marine Kandla in manner as above. The total sales comes to Rs. 17,50,000 and the same is being offered as additional income over and above the regular income for the previous year relevant to assessment year 1999-2000.
25. In continuation, the assessee was put forth the question Nos. 9 and 10,which along with their respective answers are as under: Q.9. Please furnish the books of account of both the firms M/s.
Samta Marine Kakinada and M/s. Samta Marine Kandla for the current financial year 1998-99? Ans. As discussed above, there is no fresh business carried out by M/s. Samta Marine Kakinada and M/s. Samta Marine Kandla during the current financial year. Therefore, books of account have not been prepared.
Q.10. In absence of books how can you monitor the bills payable or bills receivable during the current year? Ans. M/s. Samta Marine Kakinada follows cash system of accounting.
Bills raised but not received during the financial year 1997-98 is around Rs. 30 lakhs. However, bills realizable is about Rs. 20 lakhs as Rs. 10 lakhs approximately due from M/s. Hindustan Lever Ltd. is under dispute and is not recoverable. The sum of Rs. 20 lakhs considered good is being offered as income for the current year ie., assessment year 1999-2000.
M/s. Samta Marine Kandla follows mercantile system of accounting.
There are a few sundry creditors being brought forward from previous year which are proposed to be written off during the current financial year. The list of such creditors is furnished the total of which comes to Rs. 12,53,203. This sum of Rs. 12,50,000 is being offered as additional income for the current year i.e., assessment year 1999-2000 over and above the regular income, if any.
26. In question No. 11, the assessee was asked to summarise the additional income offered in the two firms for various years and for this Mr. Rajesh Bahl in the account of M/s. Samta Marine Kakinada i.e., the assessee herein offered additional income of Rs. 12 lakhs in assessment year 1996-97, Rs. 10 lakhs in assessment year 1997-98 and Rs. 8 lakhs in assessment year 1998-99 on account of expenses. In relation to assessment year 1999-2000, total additional income of Rs. 70 lakhs was offer as under:(i) On account of goodwill (Ref. Q. No. 7): : Rs. 25,00,000(ii) On account of cash received (Ref. Q. No. 7) (a) Tarpaulin sale : Rs. 7,50,000 (b) Gunny bags sale : Rs.17,50,000(iii) On account of bills receivable (Ref. Q. No. 10) : Rs. 20,00,000 Total : Rs. 70,00,000 27. The assessee while furnishing the Return of Income included aggregate sum of Rs. 25 lakhs on account of sale of gunny bags and tarpaulin as offered during the course of survey. But the additional income offered on account of goodwill of Rs. 25 lakhs and on account of bills receivable ie., Rs. 20 lakhs was not offered for taxation on the plea that the assessee is following cash system of accounting and since the said amounts was not received during the year under consideration, the same are not includible in the hands of the assessee. From the perusal of assessment order for assessment year 1997-98, as pointed out by the learned authorised representative for the assessee, we find that in column No. 8 with regard to method of accounting the assessing officer has mentioned 'cash' that means cash system of accounting. In the year under consideration in the assessment order similar notings have been made, though in assessment year 1998-99, the method of accounting is mentioned as mercantile. When queried during the course of hearing, the learned authorised representative for the assessee vehemently stressed that the assessee has been following cash system of account since inception of the business.
28. In the background of the fact, where the assessee is following cash system of accounting, only those receipts which have been received by the assessee during the financial year are includible as income from business in the hands of the assessee. The addition on account of bills receivable amounting to Rs. 20 lakhs is not merited in the case where the assessee is following cash system of accounting. Only those receipts against which money has been received by the assessee during the financial year are tobe included in the hands of the assessee. The heading of the account being bills receivable, clearly points out that the said sums are receivable from parties. The assessing officer made the addition only on account of bills receivable amounting to Rs. 20 lakhs. In the facts and circumstances of the case, where the assessee is following cash system of accounting, there is no merit in including any sum of money on account of bills receivable. Thus, we dismiss the ground of appeal raised by the revenue with regard to bills receivable amounting to Rs. 20 lakhs.
29. The second addition made by the assessing officer was on account of goodwill amounting to Rs. 25 lakhs. During the course of survey, when the statement of Mr. Rajesh Bahl was recorded, he was confronted with the notings in his diary Annexed as A-5 and in respect of the notings on page 65, he had admitted that "As per the decision arrived at after discussion, with my brother Shri Rajiv and the Partner Mrs. Salma Jayraj (Mr. Nair), the business of M/s. Samta Marine Kakinada was transferred to the Pvt. Ltd. Co., viz. M/s. Samta Services (Kakinada) Pvt. Ltd." It was a categoric admission of Mr. Rajesh Bahl on behalf of the assessee that the business of the assessee-firm was transferred to the Pvt. Ltd. Co., i.e., M/s. Samta Services (Kakinada) Pvt. Ltd. It was further stated in the said answer to question No. 7 that 'it was mutually decided that the firm would receive an amount of Rs. 25 lakhs as goodwill'. Thus implying that till the date of survey the sum of Rs. 25 lakhs was to be received and it is the claim of the assessee that the said sum of Rs. 25 lakhs has not been received during the financial year. The Commissioner (Appeals) deleted the addition on the basis that as the assessee was following cash system of accounting and since the said sum of Rs. 25 lakhs was not received during the financial year, the same cannot be form pari: of income: for the year under consideration.
30. While determining the income under the head 'Income from business', the provisions of the Act allow that the assessee may either follow mercantile system of accounting or cash system of accounting. In mercantile system of accounting all such receipts which are received or receivable by the assessee during the financial year are to be included as income of the assessee for the said financial year. But, in cash system of accounting, though the assessee was to receive receipts on various accounts but only such receipts which have been received during the financial year are to be included in the hands of the assessee. The goodwill arising on transfer of business, if includible in the hands of the assessee as income is not includible as income from business but as income under the head 'Income from Capital Gains'. The method of accounting whether mercantile or cash system is not applicable while determining the income under the head 'Income from Capital Gains'.
31. Under the provisions of Section 45 of the Income Tax Act, any profits or gains arising from transfer of Capital Asset, which is effected in the previous year is chargeable to income-tax under the head 'Capital Gains'. The section further provides that such gain shall be deemed to be the income of the year, in which transfer takes place.
The question to be seen is whether the transfer of the capital asset is effected in the previous year, irrespective of whether the sale consideration has been received or not received in the said previous year, the Capital Gains is to be computed as per the provisions contained under Chapter-E. (1) in relation to a capital asset being goodwill of a business (or a right to manufacture, produce or process any article or thing) (or right to carry on any business) shall be taken to be nil; and (i) where the capital asset became the property of the previous owner or the assessee before the (1st day of April, (1981)), (***) means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in (Sub-section (1) of) Section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head Interest on securities', 'Income from house property', 'Profits and gains of business or profession', or 'Income from other sources', and the expression 'improvement' shall be construed accordingly.
(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; (aa) (in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee (B) is allotted any additional financial asset without any payment, then, subject to the provisions of Sub-clauses (i) and (ii) of clause (i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset,means the amount actually paid for acquiring the original financial asset; (ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee; (iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset; (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee;) and (iv) in relation to any financial asset purchased by any person in whose favour the right to subscribe to such asset has been renounced, means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset;) ((ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for (demutualisation or) corporatisation approved by the Securities and Exchange Board of India established under Section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange:) (Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil;) (i) where the capital asset became the property of the assessee before the ( 1 st day of April, (1981), means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the (1st day of April, (1981), at the option of the assessee; (ii) where the capital asset became the property of the assessee by any of the modes specified in (Sub-section (1) of) Section 49,and the capital asset became the property of the previous owner before the ( 1 st day of April, (1981), means the cost of thecapital asset to the previous owner or the fair market value of the asset on the (1st day of April, (1981), at the option of the assessee; (iii) where the capital asset became the property of the assessee onthe distribution of the capital assets of a company, on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under Section 46, means the fair market value of the asset on the date of distribution; (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares, (d) the sub-division of any of the shares of the company into shares of smaller amount, or (e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived).
33. Section 55(2) of the Income Tax Act provides that for the purpose of computing the cost of acquisition in respect of goodwill of a business shall be taken at the cost at which it is acquired from the previous owner or at Nil The said insertion was made by the Finance Act, 1994 with effect from 1-4-1995, which provided that "in relation to Capital Asset being goodwill of a business." In other words, once any goodwill of business arises to any person, the same is includible in the hands of the said person under Chapter-E i. e., Capital Gains and not under Chapter-D i.e. Profits and Gains of Business or Profession. There is no merit in the argument of the assessee that the said income is not includible in the hands of the assessee as the assessee was following cash system of accounting and the said receipt has not been received during the financial year. Since the said income is includible as Income from Capital Gains, the same arises in the previous year, wherein the transfer of Capital Asset takes place and the same is deemed to be the income of that year. In case, where any business is transferred during the previous year relevant to the year under consideration, the goodwill arising on transfer of such business is assessable in the hands of the assessee as Capital Gains irrespective of the fact whether the said amount is received by the assessee in the year under consideration or in the succeeding years. As the ba.sis of transaction is the transfer of Capital Asset and any Profits or Gains arising therefrom i.e., the transaction in question if it takes place in a particular financial year, the Profits or Gains therefrom are includible in the hands of the said person in the said year itself, as Income from Capital Gains.
34. Coming to the facts of the present case, while recording the statement on 5-11 -1998, the assessee in reply to question No. 7 had admitted that "the business of M/s. Samta Marine Kakinada was transferred to the Pvt. Ltd. Co., viz. M/s. Samta Services (Kakinada) Pvt. Ltd.". In case the said transfer of business has taken place during the financial year relevant to assessment year 1999-2000, the profits and gains on transfer of goodwill is includible in the hands of the assessee in the year under consideration even if the consideration on account of goodwill has not been received by the assessee. During the course of assessment proceedings, the assessing officer has observed in para 5.2 at page 6 of the order as under: 5.2 As regards goodwill of Rs. 25 lakhs it is a fact that the decision of receiving goodwill was taken and the business had also been transferred to M/s. Samata Services (Kakinada) (P.) Ltd However, the assessee has not received the goodwill for M/s. Samata Services (Kakinada) Pvt. Ltd. for a simple reason that the moment the assessee receives the goodwill or debits the amount of goodwill to the account of M/s. Samata Services (Kakinada) Pvt. Ltd., the goodwill shall become taxable in the hands of the assessee. There is no doubt as regards the receiving the goodwill as the only condition for receiving the goodwill viz., Transferring of business to M/s.
Samata Services (Kakinada) (P.) Ltd., has been fulfilled. It is clear that the assessee in connivance with its sister concern has not passed the relevant entries in the books of account and has not received the amount of goodwill due from its sister concern to avoid taxes. Further Shri Rajesh Bahl had categorically declared the amount of Rs. 25 lakhs as additional income to be offered for assessment year 1999-2000 on account of goodwill in answer to Q. No. 11. Thus it is the duty of the assessee to pay taxes thereon. Hence, an amount of Rs. 25 lakhs on account of goodwill is hereby added to the total income of the assessee.
35. The assessee on the other hand claims that the business of the assessee-firm has not been transferred to the Pvt. Ltd. Co. In view of the contradictory statement, we deem it fit to restore the issue to the file of assessing officer for limited purpose of determining whether the business of the assessee-firm has been transferred to the Pvt. Ltd. Co., viz-, M/s. Samata Services (Kakinada) Pvt. Ltd. during the year under consideration. In case, the said business has been so transferred to the Pvt. Ltd. Co., the income arising from goodwill is includible in the hands of the assessee under the head 'Income from Capital Gains', irrespective of the fact that whether the said amount has been received or not. The assessing officer shall afford a fair and reasonable opportunity of hearing to the assessee and decide the issue in line with our directions hereinabove. Thus, the ground of appeal raised by revenue is partly allowed for statistical purpose.
36. In the result, the appeal for assessment year 1997-98 being ITA No.4807/Mum./2002 and the cross-objection for assessment year 1999-2000 filed by the assessee being CO No. 44/Mum./2004 are dismissed and the appeals filed by the revenue for assessment years 1997-98 and 1998-99 being ITA Nos. 5368/Mum./2002 and 308/Mum./2003 are dismissed and the appeal for assessment year 1999-2000 being ITA No. 309/Mum./ 2003 is partly allowed for statistical purpose.