Patent agreement payments treated as royalty-like revenue receipts, not capital sale instalments, and no exemption applied.

Annual payments under the patent agreement were treated as revenue receipts because the agreement, read as a whole, did not transfer the patent corpus absolutely for a fixed and ascertained price. The payer received only the use of the patent for an indeterminate period, while the grantor retained property in the patent and further rights under the arrangement. Although the document used the words "licence" and "royalty," the substance was consideration for use of the patent, akin to royalty, not instalments of a capital sale price. The receipts were therefore income, profits and gains and were not exempt under section 4(3)(vii).

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Issues: Whether the annual payments received under the patent agreement were capital receipts as instalments of the sale price, or taxable income in the nature of royalty from a working licence, and whether they were exempt under section 4(3)(vii).

Analysis: The decisive question was the real character of the agreement read as a whole. Although the document used the words "licence" and "royalty", the substance of the arrangement had to be determined from its operative terms. The agreement did not transfer the corpus of the patent absolutely for a fixed and ascertained price payable in instalments. The annual sum of Rs. 4,500 was payable so long as the patent arrangement subsisted, the duration of the arrangement was uncertain, the Company retained only the use of the patent for an indeterminate period, and the grantor continued to retain property in the patent with further rights and interests preserved by the agreement. On that footing, the receipt was not a capital sum representing sale price, but consideration for the use of the patent, akin to royalty, and therefore revenue in character.

Conclusion: The annual receipts were income, profits and gains, not capital receipts, and they were not exempt under section 4(3)(vii).

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