In the ITAT Mumbai Bench ‘J’

Deputy Commissioner of Income-tax, Range 12(1), Mumbai

v.

Samta Marine Kakinada

I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1997-98 and 1998-99 - Assessee was carrying on business of clearing and forwarding agent - A survey was carried out at premises of assessee, wherein certain papers/documents were seized - All said documents/papers related to assessment year 1996-97 and when confronted, assessee offered a sum of Rs. 12 lakhs as additional income on account of expenses like labour stitcher, boat hire and transport charges and various other miscellaneous expenses - Assessee made similar declaration in assessment year 1997-98 amounting to Rs. 10 lakhs and in assessment year 1998-99 amounting to Rs. 8 lakhs - But in returns of income for assessment years 1997-98 and 1998-99, assessee had not included said additional income offered during survey proceedings - Assessing Officer, however, made addition of said additional income to income of assessee - Whether since assessee had incurred said expenditure in course of carrying on of its business and moreover, Assessing Officer had failed to bring on record any documentary evidence to prove non-genuineness of expenses, in such circumstances, Assessing Officer was not justified in making addition of additional income offered during survey proceedings - Held, yes

II. Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment year 1999-2000 - Whether in cash system of accounting, only those receipts which have been received by assessee are includible as income from business in hands of assessee - Held, yes - Whether, therefore, any sum of money on account of bills receivable cannot be treated as income of assessee in cash system of accounting - Held, yes

Section 45, read with sections 28(i) and 55, of the Income-tax Act, 1961 -Capital gains - Chargeable as - Assessment year 1999-2000 - Whether goodwill arising on transfer of business is assessable under head ‘Income from capital gains’ and method of accounting whether mercantile or cash system is not applicable while determining income under head ‘Income from capital gains’ - Held, yes

Facts I

The assessee was carrying on the business of clearing and forwarding agent. The competent authority carried out a survey under section 133A at the premises of the assessee and seized certain papers/documents. All the said documents/papers related to the 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 also admitted that certain vouchers for expenses were not supported by third party evidence. The assessee, therefore, offered a sum of Rs. 12 lakhs as additional income for the assessment year 1996-97 and the same was accepted by the Assessing Officer. The assessee had made similar declaration on account of expenses in the assessment year 1997-98 amounting to Rs. 10 lakhs and in the assessment year 1998-99 amounting to Rs. 8 lakhs. The assessee, however, in the returns of income for the assessment years 1997-98 and 1998-99 had not included the said additional income. The Assessing Officer in the assessment year 1997-98 had disallowed the expenses of Rs. 44,34,369, as the assessee had failed to furnish documentary evidence apart from the self-made vouchers. Similarly, the Assessing Officer in the assessment year 1998-99 had disallowed expenses of Rs. 8 lakhs claimed by the assessee to be incurred during the course of business in accordance with the disclosure made by the assessee during the course of survey

On appeal, the Commissioner (Appeals) in the assessment year 1997-98 had reduced the addition from Rs. 44,34,369 to Rs. 4,14,490. Further, the Commissioner (Appeals) in the assessment year 1998-99 had deleted the entire addition made by the Assessing Officer by applying the net profit rate of the assessment year 1996-97.

On cross appeal :

Held I

The sole basis for making the addition in the assessment years 1997-98 and 1998-99 was the additional income offered and accepted in the assessment year 1996-97. The basis for offering and acceptance of additional income in the assessment year 1996-97 were the vouchers found during the course of survey conducted at the premises of the assessee which negativated the claim of expenses in the said year. No such vouchers were found in respect of the assessment years 1997-98 and 1998-99, though survey was carried out at the premises of the assessee. 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. [Para 12]

The assessee was 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 were carried on. From the perusal of the comparative statement of gross receipts and net profit, it was clear that the gross receipts of the assessee had fallen from the assessment years 1996-97 to 1998-99. However, as against the fall in business, the assessee had shown increase in net profit rate of 3.09 per cent in the assessment year 1997-98 and 4.9 per cent in the assessment year 1998-99 as against 2.03 per cent declared in the assessment year 1996-97. Even after including the additional income of Rs. 12 lakhs declared in the assessment year 1996-97, the net profit rate worked out to 4.89 per cent. [Para 13]

Further, since 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 was no merit in the addition of additional income offered during the survey proceedings. Therefore, the Commissioner (Appeals) was justified in his view. [Para 14]

Facts II

During the course of survey under section 133A carried out at the premises of the assessee-firm, one of the partners of the assessee-firm, namely, ‘R’ made a statement that the business of the assessee-firm was transferred to a company ‘S’, and that it was mutually decided that the assessee-firm would receive an amount of Rs. 25 lakhs as goodwill from ‘S’. The assessee further made disclosure of Rs. 25 lakhs on account of goodwill and of Rs. 20 lakhs on account of bill receivable as additional income for the assessment year 1999-2000. The assessee had not declared the said amounts for taxation in the relevant assessment year 1999-2000. The assessee further in reply to a notice issued by the Assessing Officer submitted that it was following cash system of accounting and as it had not received the aforesaid amounts during the year under consideration, the same were not included as income for the year. It also explained that no amount was received towards goodwill account due to bad market/business conditions and the same was also not provided for in the books of account of the company ‘S’. It also stated that the offer was made during the course of survey only subject to the condition that the income from bills receivable would be included, if realized during the year. The Assessing Officer included in the income of the assessee the sum of Rs. 25 lakhs on account of goodwill holding that the relevant entries were not passed in the books of account by the assessee in connivance with the company ‘S’. He also included in the income of the assessee the sum of Rs. 20 lakhs on account of bill receivable, as the same was declared as additional income by the assessee during the course of survey.

On appeal, the Commissioner (Appeals) deleted the impugned additions made by the Assessing Officer holding that the assessee had not received the said amount and since the assessee was following cash system of accounting, the same could not be included in the income of the assessee during the year under consideration.

On revenue’s appeal :

Held II

Where the assessee follows 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 assessee was following cash system of accounting. The heading of the account being bills receivable clearly pointed out that the sum of Rs. 20 lakhs was receivable from parties. Therefore, there was no merit in including any sum of money on account of bills receivable to the income of the assessee. Therefore, the revenue’s appeal was liable to be dismissed on this issue. [Para 28]

From the statement of ‘R’ made during the course of survey, it was clear that till the date of survey the sum of Rs. 25 lakhs was to be received and it was the claim of the assessee that the said sum of Rs. 25 lakhs had not been received during the financial year. [Para 29]

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’ and the method of accounting whether mercantile or cash system is not applicable while determining the income under the head ‘Income from capital gains’. [Para 30]

Under the provisions of section 45, any profit or gain 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. [Para 31]

Section 55(2) provides that for the purpose of computing the capital gains, 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-IV(E), i.e., Capital gains and not under Chapter-IV(D), i.e., Profits and gains of business or profession. There was no merit in the argument of the assessee that the income of Rs. 25 lakhs arising on account of goodwill was not includible in the hands of the assessee, as the assessee was following cash system of accounting and the said receipt had not been received during the financial year. [Para 33]

During the course of survey, ‘R’ admitted that the business of the assessee-firm was transferred to the company ‘S’. In case, the said transfer of business had taken place during the financial year relevant to the assessment year 1999-2000, the profits and gains on transfer of goodwill would be includible in the hands of the assessee in the year under consideration even if the consideration on account of goodwill had not been received by the assessee. However, it was contended by the assessee that the business of the assessee-firm had not been transferred to the company ‘S’ during the relevant financial year. Therefore, the matter was to be restored to the file of the Assessing Officer for limited purpose of determining as to whether the business of the assessee-firm had been transferred to company ‘S’ during the year under consideration. In case, the said business had been so transferred to ‘S’, the income arising from goodwill would be includible in the hands of the assessee under the head ‘Income from capital gains’, irrespective of the fact that whether the said amount had been received or not. [Para 35]