COMMISSIONER OF INCOME TAX Vs. MICRONIC DEVICES

JUDGEMENT

(1.) THESE two appeals arise of a common order of the Tribunal preferred by the Revenue. Therefore, they are taken up for consideration together and disposed of by this common order.

(2.) THE assessee was carrying on the business of agency and development of software. It was a partnership firm. In respect of assessment year. 1995-96, the assessee filed return of income declaring income of Rs. 94,112 on 31.10.1995. Intimation under section 143(l)(a) of the Act came to be issued. Thereafter, scrutiny assessment came to be completed under section 143(3) of the Act by an order dated. 30th Sept., 1996. Thereafter, the assessing officer found that income liable to tax had escaped assessment. Therefore, he proceeded to reopen assessment under section 147 of the Act. Notice under section 148 was issued. The assessee filed a reply stating that income already filed may be treated as a response to the notice under section 148 of the Act. In the course of reassessment proceedings, the assessing officer held that Rs. 97 crores paid to the assessee firm by the company had not been reflected in its accounts and the entire arrangement was fictitious and a colourable device to avoid tax. Therefore, entire amount of Rs. 2.97 crores was brought to tax by an order dated. 28.03.2002. The assessee preferred an appeal to the Appellate Commissioner. He contended that the said amount of Rs. 2.97 crores was paid to conduct agency business which was only a goodwill. The said contention was rejected by the Appellate Commissioner. He held that the entire transaction was a coloural (colourablc) device to describe the consideration of Rs. 2.97 crores .as payment for non-competition and transfer of right to conduct agency business and to claim the same as capital receipt, not chargeable to capital gains. Therefore, he directed the Assessing Officer to tax Rs. 2.97 crores as long-term capital gains on the sale of goodwill, inasmuch as, the cost of acquisition of the same has to be taken "nil" as per section 55(2)(a) of the Act. Consequently, the finding of the assessing officer that the entire amount should be treated as revenue receipt was set aside. Challenging the said order, the assessee preferred an appeal to the Tribunal. The Revenue also preferred an appeal to the Tribunal challenging the said finding that the entire consideration should be treated as capital receipt. The Tribunal held that the entire reopening of assessment was at the instance of audit objection and therefore the assumption of jurisdiction for reopening of assessment was held to be invalid. Further, it was held that the balance sheet reflecting the sum of Rs. 2.97 crores and the retirement deed was before the assessing officer when the original assessment came to be passed and therefore it amounted to change of opinion. Further, it was held that the said company took over the entire business with all its assets and liabilities including goodwill. The sum of Rs. 2.97 crores was paid in composite manner for non-competition fee, goodwill and other assets. Having regard to the circumstances and the facts of the case, it was held that 75 percent of the above sum should be treated as non-compete fee and the rest towards goodwill and other assets. Against the said order the assessee has not preferred any appeal. It is only the Revenue which has challenged the said order.

(3.) IN the light of the aforesaid facts and the rival contentions the substantial questions of law that arise for our consideration in these appeals are as under :