1956 (11) TMI 40 - DSC - Income Tax

Court remits case for assessment of lb100,000 payment attribution to secret processes.

The court remitted the case back to the commissioners to determine the extent to which the lb100,000 payment should be attributed to the transmission of ... - Issues Involved:1. Whether the sum of lb100,000 paid to the company by the Government of Burma was part of the company's annual profits or gains for income tax purposes.2. Whether the transaction fell within the scope of the company's business.3. Whether the lb100,000 should be treated as capital or income in the company's hands.Detailed Analysis:Issue 1: Inclusion in Annual Profits or GainsThe primary question raised was whether the lb100,000 paid to Evans Medical Supplies Ltd. by the Government of Burma should be included in the company's assessment for income tax for the year 1954-1955 as part of 'the annual profits or gains arising to the company from its trade' under Case I of Schedule D, incorporated in section 122 of the Income Tax Act, 1952. The agreement between the company and the Government of Burma involved the company providing drawings, designs, plans, technical data, and 'know-how' necessary for establishing a factory in Burma. The company argued that the sum was a lump sum payment for imparting necessary information to set up a production facility, not part of the annual profits or gains.Issue 2: Scope of the Company's BusinessThe second issue was whether the transaction recorded in the agreement fell within the scope of the company's business as it was carried out at the time the agreement was made. The commissioners found that the agreement, though special and unprecedented, was within the general scope of the company's business operations. The judge, however, disagreed, stating there was no evidence to support the commissioners' determination. The company's chairman and managing director testified that entering into the agreement was seen as the best method to develop its business under the circumstances, which influenced the commissioners' conclusion.Issue 3: Capital or IncomeThe third issue was whether the lb100,000 should be treated as capital or income in the company's hands. The judge concluded that the company was parting for ever with its secret processes, which constituted a capital asset. The commissioners, however, viewed the obligations under Part I of the agreement as providing services without any sale or assignment of property. The court discussed whether the transaction was a parting with a capital asset or a method of trading to acquire money as part of the profits and gains of trade. The court acknowledged the difficulty in distinguishing between the two but leaned towards treating the lb100,000 as a fee for general services rendered in the course of business.Conclusion:The court decided to remit the case back to the commissioners to determine to what extent the lb100,000 should be attributed to the transmission of secret processes by the company to the Burmese Government. The court emphasized that the right to treat the lb100,000 as capital should be limited to the extent it was referable to secret processes analogous to patents or copyrights. The commissioners were instructed to adjust the assessment accordingly, considering the part of the sum attributable to the imparting of secret processes as a capital receipt.