Prajna Technologies & Services Pvt. Ltd., VS DCIT (ITAT Hyderabad)
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ‘A, HYDERABAD
ITA No. 1331/Hyd/2010 : Assessment year 2002- 03
M/s. Prajna Technologies & Services Pvt. Ltd., VS DCIT
O R D E R
Per Akber Basha, AM:-
The appeal filed by the assessee is directed against the order of the CIT (A)-V, Hyderabad dated 11-8-2010 and it pertains to the assessment year 2002-03.
2. The grounds raised by the assessee read as under:-
“1. The order of the CIT (A) is erroneous both on facts and in law.
2. The CIT (A) erred in not deciding the ground against reopening under section 147 of the Act.
3. The CIT (A) ought to have appreciated the fact that there is no definite information with the assessing officer that there is escapement of income and therefore ought to have held reopening as bad in laws.
4. The CIT (A) erred in holding that what is transferred through MOU is only right to produce aviation software without appreciating the fact that bundle of rights which includes consultancy also and thereby erred in holding that such a transfer attracts capital gains.
5. Any other ground that maybe urged at the time of hearing.”
3. Ground Nos. 1 and 5 are general in nature and they do not require any adjudication.
4. Ground Nos. 2 and 3 are not pressed during the course of hearing and hence they are dismissed as not pressed.
5. The only remaining effective ground for our consideration reads as under:-
“The CIT (A) erred in holding that what is transferred through MOU is only right to produce aviation software without appreciating the fact that bundle of rights which includes consultancy also and thereby erred in holding that such a transfer attracts capital gains”.
6. Briefly stated facts of this issue are that the assessee company engaged in the business of consultancy for business management and financial management, filed its return of income for the assessment year 2002-03 on 31-10-2002 admitting Nil income. The return of income was processed under section 143(1) of the Act on 27-12-2002. Subsequently, it was noted by the assessing officer that the assessee had sold commercial rights for a consideration of Rs.31,75,000/- to M/s Pintell Systems Pvt. Limited. In order to consider the issue of capital gains, the assessment was reopened and the assessing officer completed the assessment under section 143(3) read with section 147 of the Act by determining the total income of the assessee at Rs.13,53,218/-. Aggrieved by the order of the assessing officer, the assessee went in appeal before the CIT (A). On appeal, the CIT (A) held that, after considering the arguments of the assessee as well as all the facts of the case, section 55(2)(a) of the Act is applicable in the instant case. The CIT [A] found that what the assessee had sold is not the right to carry on any business observing that the assessee company is in the business of consultancy for business management, financial management, software development and project execution with M/s ELDIS. By referring to MOU with M/s. ELDIS, he pointed out that the assessee entered into an agreement with M/s ELDIS Sro for making certain specific software for that company as and when required until 31-3-2010 and hence, it is a sale agreement with a specific client. The same MOU was thereafter sold to M/s Pintells Systems (P) Limited. He held that the sales contract with regard to certain software for a particular client for a specified period was sold to M/s Pintells Systems Private Limited. It was held by the CIT(A) that the assessee had never sold its right to carry on the business of software development or its right to carry on any business and it merely sold a specific sales contract with a client, which is routine outsourcing in all businesses. The CIT (A) after considering the facts and the circumstances of the case and also referring the expression from section 55(2)(a) of the Act, “right to manufacture, produce or process any article or thing”, held that the assessee clearly fell within the purview of sub-section 55(2)(a) of the Act. He accordingly confirmed the action of the assessing officer that the amount received on the sale of the MOU was taxable as per specific provision of the Act. Aggrieved by the order of the CIT [A], the assessee is in appeal before us.
7. The learned counsel for the assessee submitted that section 2(14) of the Act defines the term “capital asset” to mean property of any kind held by an assessee whether or not connected with his business or profession. Certain exceptions have been provided in this sub-section. Therefore, marketing rights can be conveniently included in the definition of the capital asset and in order to compute the amount of capital gain, it is sine quanon that the capital asset transferred must possess cost of acquisition. In the instant case, what the assessee transferred was its commercial right of consultancy and of development of different types of software in the aviation field, for which it received consideration of Rs.31,75,000/- which the assessee acquired by virtue of earlier agreement entered into with ELDIS Sro Czech free of cost on 1-10- 2001. As per the provisions of section 48 of the Act, 1961 dealing with mode of computation of capital gains, clause (II) of the said section stipulates that cost of acquisition of the asset and the cost of improvement thereto shall be deducted from the full value of consideration accruing or resulting as a result of transfer of the capital assets. It is submitted that unless there is cost of acquisition of a capital asset transferred by an assessee the computation provisions as prescribed under section 48 cannot be applied and the receipt would fall outside the net of taxation. The amendment to section 55(2)(a) bringing the transfer of commercial right to capital gains tax is effective from the assessment year 2003-04 and not 2002-03 and this is fortified by the decision of 8ASF India Ltd., vs. Addl. CIT, Range 6(1), Mumbai (2009) 119 ITD 337 (Mum). As stated herein above, while working out the capital gains, the assessing officer has adopted Nil cost for the asset which shows that he is in agreement with the assessee’s claim that there was no cost of acquisition for the asset sold. While accepting the assessee’s contention but ignoring the Hon’ble Supreme Court’s decision in the case of B. C. Srinivasa Setty applicable to the assessment year under consideration, the assessing officer arbitrarily imposed capital gains tax on the entire consideration received on account of transfer of the said asset.
8. On the other hand, the learned departmental representative relied on the orders of the authorities below and submitted that the assessee never sold its right to carry on the business of software development or its right to carry on any business. What was sold by the assessee company is only a specific sale contract with the client which is routine outsourcing in all the business.
9. We have considered the submissions of the rival parties and perused the material available on record. We find from the order of the CIT (A) that the assessee had never sold its right to carry on the business of software development or its right to carry on any business and it merely sold a specific sales contract with a client, which is routine outsourcing in all businesses and in the present case, only a specific contract has been outsourced. We further find that the expression from section 55(2)(a) of the Act which is applicable in the instant case “right to manufacture, produce or process any article or thing”, and in our opinion, the case of the assessee clearly fell within the purview of sub-section 55(2)(a) of the Act and there is no doubt that the amount received on the sale of the MOU was clearly taxable as per specific provision of the Act. The said expression in section 55(2)(a) of the Act was inserted by the Finance Act, 1997 with effect from 1-4- 1998 and hence the contention of the learned counsel for the assessee that the amendment to section 55(2)(a) bringing the transfer of commercial right to capital gain tax is effective from the assessment year 2003-04 and 2002-03, is not correct. In view of the above and after considering the totality of facts and the circumstances of the instant case, we do not find any infirmity in the order of the CIT (A) in upholding the order of the assessing officer. Therefore, no interference is called for.
8. In the result, the appeal filed by the assessee is dismissed.
Order was pronounced in the Court on 24 – 06-2011.