2014 (9) TMI 891 - HC - Income Tax

Court rules entire license fee taxable in year of receipt, penalty deleted for bona fide conduct.

New Holland Tractors (India) Private Limited Versus Commissioner of Income Tax, Delhi-V

The court upheld that the entire license fee of Rs. 15,68,50,000/- should be taxed in the year of receipt rather than spread over three years. The court ... Taxability of license fee - Whether entire license fee received or paid under the agreement dated 14th July, 1995 is taxable in the year of receipt or it should be spread over three years – Held that:- The students were required to make deposit of the whole fee for the entire course, but it was held that the amount deposited also included “deposit” or “advance” and it cannot be said that the entire fee had become “due” at the time of deposit - The fee was paid in advance presumably as there should not be any default in payment by the students during the term of the course - assessee adopted another line of argument - It was submitted that the appellant-assessee would have been liable for damages in case of defective technology - Therefore the amount received had not accrued or arisen and it would have accrued or arisen only after end of three years - There is no specific stipulation in the agreement relating to damages in case the technology made available between 1991-94 was found to be defective - unknown and off chance claim for damages in the present factual matrix is certainly not equivalent to claim for warranty, which are to be allowed only on the basis of past data, as products sold and consideration are taxable and, therefore, the expenses which have to be incurred to meet the warranty claims computed on scientific and actuarial basis, have a co-relation with the receipt - Contingent liability is not an expenditure and even when an assessee is following mercantile system of accounting, it cannot be allowed as a deduction u/s 37 of the Act - The submission does not have any merit as it relates to unascertained liability, the happening of which was dependent on a doubtful and uncertain contingency in future. The amount received was not an inchoate amount depending upon any contingency before it could be appropriated - The appellant-assessee was not under an obligation to refund the said amount under any of the clauses - Liability to pay damages under the law of contract for breach of a contract does not make the receipt an inchoate receipt - revenue accepts that if ₹ 15,68,50,000 is taxed in the AY 1996-97, then the bifurcated differential amount should not be taxed in the AYs 1997-98 to 1999-2000 – thus, the order of the Tribunal is upheld – Decided against assessee. Levy of penalty for concealment u/s 271(1)(c) – Inaccurate particulars filed or not – Held that:- The assesee had discharged the onus, there is no allegation that full details with regard to the agreement, quantum of receipt, the factum why the payment was made and also the fact that the receipts had been offered for taxation in four separate assessment years, were duly disclosed and stated - assessee had claimed that technical know-how would be used for three years and, therefore, consideration received was relatable to three years - the assessee did not try to draft the agreement in a way, which could have ensured that the amount received was bifurcated/divided as income of four assessment years - in view of the explanation offered by the assessee it is not a fit case, where penalty for concealment of income u/s 271(1)(c) should be imposed - The assessee‘s conduct shows that they had acted in a bona fide manner and also furnished all material facts and particulars – Penalty u/s 271(1)(c) is directed to be set aside – Decided in favour of assessee. Issues Involved:1. Taxability of the entire license fee in the year of receipt or over three years.2. Imposition of penalty for concealment under Section 271(1)(c) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Taxability of the License Fee:The primary issue in ITA No. 182/2002 was whether the entire license fee of Rs. 15,68,50,000/- received under the agreement dated 14th July 1995 should be taxed in the year of receipt (Assessment Year 1996-97) or spread over three years. The Tribunal, Commissioner of Income Tax (Appeals), and Assessing Officer held that the amount was taxable in the year of receipt as the income had accrued and was not postponed to subsequent years. The assessee argued that the fee should be proportionately taxed over three years, but the court referred to precedents like Commissioner of Income Tax vs. Dinesh Kumar Goel and held that income accrues when the right to receive it is established, regardless of actual receipt. The court noted that the technology was already provided and no further services were required after the agreement date. Thus, the entire amount was taxable in the year of receipt, and the appeal was dismissed.2. Penalty for Concealment:In ITA No. 255/2003, the issue was whether the penalty under Section 271(1)(c) for concealment was justified. The court noted that while the quantum appeal was decided against the assessee, it did not automatically mandate a penalty for concealment. The court emphasized that penalty proceedings are distinct from assessment proceedings and focus on the conduct of the assessee. The assessee had disclosed all material facts and offered an explanation for spreading the income over three years, which, although not accepted, was considered bona fide. The court referred to the Supreme Court's judgment in CIT v. Reliance Petroproducts (P) Ltd., which stated that making an incorrect claim does not amount to furnishing inaccurate particulars. The court found that the assessee's conduct was bona fide, and there was no intention to conceal income. Consequently, the penalty was deleted, and the appeal was allowed.Conclusion:In ITA No. 182/2002, the court upheld the Tribunal's decision that the entire license fee was taxable in the year of receipt. In ITA No. 255/2003, the court deleted the penalty for concealment, finding the assessee's conduct bona fide and the explanation offered reasonable.