ORDER U.T. Shah, Judicial Member

1. In this appeal, the assessee is contesting that: (i) the IAC has no jurisdiction to change the head of income while issuing the directions under Section 144B of the Income-tax Act, 1961 ('the Act'), (ii) the income-tax authorities were not justified in treating Rs. 1,40,000 being evaluation of technical know-how as his income, (iii) the income-tax authorities were not justified in treating Rs. 42,071 as income under the provisions of Section 41(2) of the Act, and (iv) the income-tax authorities were not justified in adopting the A. L. V. of the S.O. property at Rs. 9,000 instead of Rs. 6,000 declared by the assessee.

2. The assessee is an individual. The assessment year is 1978-79 and the relevant previous year ended on 31-3-1978.

3. At the time of hearing, the learned counsel for the assessee was fair enough to state that he would not press the determination of the A.L.V. at Rs. 9,000 by the income-tax authorities. We would, therefore, uphold the order of the Commissioner (Appeals) on this point.

4. As regards the profit worked out by invoking the provisions of Section 41(2), the learned counsel for the assessee stated that he reiterate the submissions which were made before the income-tax authorities. The learned representative for the department, on the other hand, supported the action of the income-tax authorities.

5. On due consideration of the rival submissions of the parties as well as the material already available on record, we do not find any infirmity in the order of the Commissioner (Appeals) on this point. We have, therefore, no hesitation in upholding his order in this regard.

6. The learned counsel for the assessee very seriously objected to the directions issued by the IAC under Section 144B whereby he changed the head of income under which Rs. 1,40,000 was brought to tax.

7. The facts in this regard as summarised by the ITO in his draft assessment order read as under:

2. In the earlier years and for a period of one month this year, the assessee had proprietary business in the name of 'Vastushilpa' as practising architects and planners. The proprietary business is run by him as such for a period of one month from 1-4-1977 to 30-4-1977. With effect from 1-5-1977, the assessee transferred his proprietary business to the partnership firm namely, Stein Doshi & Bhalla (Ahmedabad). The terms of partnership including the terms on which the proprietary business was transferred by the assessee to the firm are contained in partnership deed, the partnership firm took over all the assets of the proprietary concern of the assessee. These included the existing contracts, contracts in negotiation, goodwill, work in hand, etc., and in return, the assessee's account in the partnership firm was to be credited by Rs. 1 lakh which represents the value of goodwill taken over by the partnership firm. It is also stipulated in the terms of transfer of business that the assessee shall be entitled to withdraw the amount credited to his account as and when practicable and expedient.

3. It is further noticed that as on 30-4-1977, i.e., date on which the proprietary business of the assessee came to a close, the following entry was passed in the books of account of the proprietary business:

of expertise and technical know-how of Shri B.V. Doshi on the take over of business of Vastushilpa by the new firm Stein Doshi & Bhalla (Ahmedabad)

	Dr.	Cr.
Technical know-how account	1,40,000
To Shri B.V. Doshi's account being the evaluation		1,40,000

6. As regards the goodwill of Rs. 1 lakh and the value of technical know-how of Rs. 1,40,000 the assessee was asked to show cause why the same should not be brought to tax in his hands. The assessee by his letters dated 2-3-1981 and 6-3-1981 has argued that both the assets are intangible assets, and, therefore, any consideration received in lieu of these intangible assets cannot be brought to tax. The assessee has further argued that both technical know-how and the goodwill are synonymous and in fact 'know-how' is nothing else but goodwill. According to the assessee, goodwill of business is not taxable and, therefore, the total amount of Rs. 2,40,000 received by the assessee is not liable to be brought to tax.

7. The assessee's arguments are carefully considered. In order to appreciate the real implication of the various aspects involved, it is necessary to go into the facts leading to the accrual of credits in favour of the assessee. As discussed above, at the close of business on 30-4-1977 certain entries were made in the books of account of the assessee's proprietary business. The assessee was carrying on profession as an architect and planner. Even earlier, the source of income of the assessee was to 'sell' to his clients his expertise and skill. It is to be noted that the assessee was not dealing in the business of purchase or sale of any commodity but was engaged, so to say, in the sale of his professional skill. The assessee joined the firm as a working partner (clause 7 of the partnership deed). In other words, the assessee has agreed to use his expertise and skill for the benefit of the other partners in addition to himself. As per Clause 15 of the partnership deed, all the assets belong equally to the partners. It means that by agreeing to utilise his expertise and skill which he valued at Rs. 1,40,000, the assessee agreed to transfer part of the benefit in favour of other partners. It is well settled that the technical know-how is a capital asset. This aspect stood in the business of the assessee as on 30-4-1977. The assessee by transferring it to the firm relinquished his rights in it in favour of the new firm consisting of himself and other partners. This, therefore, amounts to transfer within the meaning of Section 2(47) of the Act. The same is, therefore, liable to tax under the head 'Capital gains'.

8. While determining the total income of the assessee at Rs. 3,19,673, the ITO included the capital gains of Rs. 1,41,000 as under:

V. Capital gain (Long term) as discussed:

Rs.
Goodwill	1,00,000
Evaluation of technical know-how and expertise	1,40,000
	2,40,000
Less: Basic exemption	5,000
	2,35,000
Less: 40 per cent	94,000
	1,41,000

9. On receipt of the draft assessment order, the assessee objected to the capital gains worked out by the ITO in respect of the technical know-how, in the following manner:

1. With regard to your proposal to add Rs. 1 lakh being amount of goodwill and Rs. 1,40,000 being amount of technical know-how as capital gain, it is submitted that your proposal is objected.

2. The amount of goodwill and technical know-how realised is not liable to capital gains tax and in this connection we rely to our detailed letter of 2nd March, 1981 and 6th March, 1981.

3. We also rely very heavily on the judgment of the Gujarat High Court in the case of Jayantilal Bhogilal Desai v. CIT [1981] 130 ITR 655 dated 25th August, 1980 a copy of which will be supplied to you if so desire.

4. We also invite your attention to the recent judgment of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294.

5. The principles laid down in the above two judgments are applicable to the facts of the case of our above client and both the goodwill and technical know-how being self-created assets for which no payment has been made capital gain is not attracted.

6. We very strongly submit that the judgment relied by you in V.R. Sonti v. CIT [1979] 117 ITR 838 (Cal.) is on different facts of the case and does not apply to the facts of our abovementioned client's case.

Vide his letter dated 3-9-1981 addressed to the IAC, the assessee once again objected to the taxability of Rs. 1,40,000 as proposed by the ITO.

10. On 14-9-1981, the IAC invited the assessee's objections as he was of the opinion that the sale of technical know-how was revenue receipt. It is necessary to reproduce below the said letter of the IAC:
Sub: Proceedings under Section 144B--assessment year 1978-79. Please refer to the discussion in the above case on 3-9-1981. After considering the arguments advanced by you and the material on record, I am of the opinion that the sale of technical know-how is a revenue receipt, which has no cost of acquisition and it is taxable under the provisions of the Income-tax Act, 1961. While the ITO has treated the sum of Rs. 1,40,000 as capital receipt. Since the change in approach will result in enhancement of income assessed, the proportionate basic exemption and the deduction of 40 per cent will not be available--you are requested to state your case before me at 3.00 p.m. on 21-9-1981. This letter is by way of a show-cause notice under the provisions of Section 144B of the Act."

11. Vide his letter dated 25-9-1981, the assessee resisted the proposal made by the IAC, in the following manner:

2. We object to your proposal and we submit that on facts of the case and as explained to you in person, Rs. 1,40,000 the sale proceeds of technical know-how is a capital receipt not liable to capital gains tax and it cannot be treated as income of the assessee also.

3. In view of above and as per provisions of law please do not proceed with, your proposal and do the needful.

12. Thereafter, the IAC issued directions to the ITO on 25-9-1981 in the caption: 'Order under Section 144B of the Income-tax Act, 1961.' On 26-9-1981, the ITO framed the assessment under Section 143(3) read with Section 144B of the Act, and included Rs. 1,40,000 in the total income of the assessee determined at Rs. 3,28,673 with the remarks 'revenue receipt from know-how as discussed in the order under Section 144B by the learned IAC (Annexure-II).' The last paragraph of his assessment order starts with the remarks 'assessed under Section 143(3) read with Section 144B of the Income-tax Act'. Along with the final assessment order, the ITO had also annexed a copy of the draft assessment order and a copy of the directions issued by the IAC under Section 144B.

13. Before the Commissioner (Appeals), it was argued on behalf of the assessee that since the IAC had no jurisdiction in changing the head under which Rs. 1,40,000 was brought to tax, the directions issued by him under Section 144B were bad in law. It was also argued on the merits of the case that Rs. 1,40,000 cannot be treated as revenue receipt. Since the assessee had parted with the capital asset and since the asset was self-generated one, Rs. 1,40,000 cannot be taxed even as capital gains. The Commissioner (Appeals), however, negatived various submissions made on behalf of the assessee and by adopting the reasonings of the IAC contained in his directions issued under Section 144B upheld the action of the ITO.

14. The learned counsel for the assessee once again vehemently argued that while issuing the directions under Section 144B, the IAC had no jurisdiction to change the head under which Rs. 1,40,000 could be brought to tax. He further submitted that under Section 144B, the IAC does not have power of enhancement, since such power was not given to him in Section 144B proceedings. In this connection, the learned counsel for the assessee invited our attention to Section 251(1)(o) of the Act, Sections 23(5) and 24(5) of the Wealth-tax Act, 1957, Sections 22(5) and 23(5) of the Gift-tax Act, 1958 and Sections 62(5) and 63(5) of the Estate Duty Act, 1953, with a view to impress upon us that whenever the Legislature want to give power of enhancement to an authority under the Act, specific provisions are provided. Since such specific provisions are not to be found in Section 144B the IAC could not have issued directions to the ITO to treat Rs. 1,40,000 as revenue receipt in the hands of the assessee. In this connection, he strongly relied on the decision of the Hon'ble Calcutta High Court in the case of Bengal & Assam Investors Ltd. v. CIT [1983] 142 ITR 156, more particularly, the last head note, which reads as under:

Having regard to the provisions of Section 144B of the Income-tax Act, 1961, because of an enhancement of an assessment as a result of directions issued by the IAC under Section 144B(4) on items not covered by a draft assessment order, the assessment will be invalid to the extent 'it was not covered by the draft', even though the enhancement has been deleted on appeal by the Commissioner (Appeals).(p. 158) He, therefore, urged that the order of the ITO in this regard should be struck down.

14.1 Anticipating an argument on behalf of the revenue that the directions issued by the IAC could be considered under Section 144A of the Act, the learned counsel for the assessee placed before us a copy of the order of the Tribunal (to which one of us was a party) in the case of Kashiram Textile Mills (P.) Ltd. [IT Appeal Nos. 1049 and 1348 (Ahd.) of 1981, dated 20-5-1983] and highlighted the fact that while following the majority decision of the Tribunal in the case of Shagoon Emporium v. ITO [1983] 3 ITD 376 (Delhi)(TM) the Tribunal was pleased to hold that once a draft assessment is framed by the ITO and communicated to the assessee, the IAC cannot issue directions under Section 144A.

14.2 On the merits of the inclusion of Rs. 1,40,000 in the total income of the assessee, the learned counsel for the assessee submitted that since the ITO in his draft assessment order has held that 'it is well settled that technical know-how is a capital asset' and since the technical know-how in question was self-generated, the provisions of Section 45 of the Act cannot be attracted in view of the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. According to the learned counsel for the assessee, the technical know-how in question is a capital asset like goodwill. He also invited our attention to the decision of the Hon'ble Delhi High Court in the case of Bawa Shiv Charon Singh v. CIT [1984] 149 ITR 29, wherein relying on the decision in the case of B.C. Srinivasa Setty (supra), the Hon'ble High Court has held that no capital gains arose on the sale of tenancy right for which the assessee had not paid any price. Similarly, the Hon'ble Bombay High Court in the case of CIT v. Modiram Laxmandas (P.) Ltd. [1983] 142 ITR 702, held that no capital gains arose on the sale of import licence for which no price was paid by the assessee. The Hon'ble Calcutta High Court in the case of CIT v. Satya Paul [1983] 13 Taxman 235, has held that no capital gains tax could be attracted on the sale of import entitlements for which no price was paid by the assessee. In this view of the matter, he submitted that even the capital gains worked out by the ITO on the transfer of technical know-how by the assessee cannot be included in the total income of the assessee.

14.3 Finally, the learned counsel for the assessee took us through the directions issued by the IAC under Section 144B, with a view to impress upon us that the IAC has not properly appreciated the ratio of various House of Lords decisions considered by him.

14.4 He, therefore, urged that Rs. 1,40,000 cannot be included in the total income of the assessee either under the head 'Income from profits and gains of business or profession' or under the head 'Capital gains'.

15. The learned representative for the department, on the other hand, strongly supported the action of the income-tax authorities. Inviting our attention to Section 144B(4) and the proviso thereto, he vehemently argued that the IAC was perfectly justified in issuing directions in the manner he did. In this connection, he stated that since 'Gross total income' did not change even after treating Rs. 1,40,000 as revenue receipts, there was no enhancement as contended on behalf of the assessee. Thereafter, he invited our attention to Section 292B of the Act, and strongly argued that the directions issued by the IAC should be upheld treating the same as issued under Section 144A. Inviting our attention to the aforesaid orders of the Tribunal in the cases of Shagoon Emporium (supra) and Kashiram Textile Mills (P.) Ltd. (supra), the learned representative for the department submitted that we should not follow the said orders of the Tribunal as the facts and circumstances obtaining in the instant case are distinguishable from the facts and circumstances considered by the Tribunal in the said orders. In this connection, he relied on the order of the Tribunal, Amritsar Bench, in IT Appeal No. 226 (Asr.) of 1979, referred to in the case of Kashiram Textile Mills (P.) Ltd. (supra). He further submitted that in view of the order of the Tribunal dated 23-3-1984 in the case of ITO v. Supan International (P.) Ltd. [1984] 9 ITD 256 (Delhi), the majority decision of the Tribunal in the case of Shagoon Emporium (supra) lost some of its conclusions.

16. He vehemently argued that if Section 144A is substituted in place of Section 144B, in the directions issued by the IAC and the assessment framed by the ITO then, the action of the IAC was quite in order and, therefore, the Commissioner (Appeals) was fully justified in rejecting all the contentions of the assessee. According to the learned representative for the department, Section 292B, would clearly protect the assessment framed by the ITO treating Rs. 1,40,000 as revenue receipt. In this connection, he stated that since there was 'mistake' and/or 'defect' as contemplated under Section 292B, in issuing the directions to the ITO, the same cannot be challenged by the assessee. Finally, he also relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Chandan & Bharat Enterprises [1983] 15 Taxman 435.

17. The learned counsel for the assessee, in his reply, strongly objected to the submissions made on behalf of the revenue that we should substitute Section 144A in place of Section 144B, wherever it is found in the draft assessment order, in the show-cause notice issued by the IAC, in the assessee's reply to the IAC, in the directions issued by the IAC to the ITO and in the final assessment order framed by the ITO, with a view to protect the interests of the revenue even though the IAC had no power to enhance the assessment while giving directions under Sectionl44B. In this connection, he relied on the decision of the Hon'ble Supreme Court in the cases of CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443.

18. We have carefully considered the rival submissions of the parties and we find considerable force in the submissions made on behalf of the assessee. If we were to keep in mind, the circumstances under which the provisions of Section 144B, were brought on the statute, it is quite clear to us that in Section 144B proceedings, the IAC has no power either to change the head of income or to enhance the assessment in the manner he did, in the instant case. A draft order under Section 144B is supplied to the assessee with a view to minimise litigation and unnecessary harassment at the hands of the assessing authorities. The assessee is invited to give his objections in respect of various items contained in the draft assessment order. If the assessee does not avail of this opportunity of placing his objections to the proposals made in the draft assessment order, it is obligatory on the part of the ITO to complete the assessment on the basis of the draft order--see Sub-section (3) of Section 144B. If, however, the assessee gives his objections to the proposals made in the draft assessment order, the ITO is required to send a copy of the draft assessment order together with the objections of the assessee to the IAC and the IAC after considering the same issues directions to the ITO with a view to enable the latter to complete the assessment--see Sub-section (4) of Section 144B. As per the proviso of this sub-section, if the directions to be issued by the IAC are prejudicial to the assessee, the IAC is required to give an opportunity of being heard to the assessee. Reading this subsection as well as the proviso in their proper context, it is unthinkable that an assessee who is objecting certain proposals made in the draft assessment order is saddled with enhanced liability which was not in the mind of the ITO when he framed the draft assessment order. In this view of the matter, we entirely agree with the submissions made on behalf of the assessee that the IAC has no jurisdiction to issue directions under Section 144B, which will result in the enhancement of the assessment. In view of the aforesaid decision of the Hon'ble Calcutta High Court, the IAC is not empowered to give directions to the ITO about a matter which is not covered by the draft assessment.

18.1 After due consideration of the submissions made on behalf of the revenue that the directions issued by the IAC on the draft assessment order should be treated as directions under Section 144A, and not under Section 144B, we have no hesitation rejecting the same as this would amount to rewriting of the entire proceedings with a view to uphold the action of the IAC. On going through the draft assessment order, the assessee's objections to the said draft assessment order, show-cause notice issued by the IAC under Section 144B, the assessee's reply thereto and various remarks appearing in the final assessment order, we have no doubt in our mind that the IAC had issued directions under Section 144B only and not under any other section including Section 144A, as contended on behalf of the revenue. We have, therefore, no hesitation in holding that the directions issued by the IAC under Section 144B, in respect of Rs. 1,40,000, are invalid and bad in law. In this view of the matter, addition of Rs. 1,40,000 cannot be sustained. The same is, therefore, deleted from the total income of the assessee.

18.2 In view of our aforesaid decision, it is not necessary to go into the merits of the case. Suffice it to say that the IAC has failed to comprehend the ratio laid down in various decisions of the House of Lords mentioned in his directions issued under Section 144B. In our view, the ITO had rightly concluded that the technical know-how is a capital asset. Since the assessee had not paid anything to acquire such capital asset, even the provisions of Section 45 cannot be attracted in view of the aforesaid decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). We entirely agree with the stand taken on behalf of the assessee that there is no difference whatsoever between this capital asset and the goodwill which the assessee sold to Stein Doshi & Bhalla. It is worthwhile mentioning here that even though the ITO had proposed that goodwill of Rs. 1 lakh sold by the assessee to the said firm should be treated as capital gains, the IAC in his directions under Section 144B, had accepted the submissions made on behalf of the assessee that in view of the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra), no capital gains tax be levied on the sale of self-generated goodwill.

19. In the result, the appeal is partly allowed.