Know-how assignment proceeds deemed capital receipt, not taxable as gains due to self-generation. Revenue appeal dismissed.

The Tribunal held that the sum received for the assignment of know-how was a capital receipt and not taxable as capital gains due to the self-generated nature of the asset with no ascertainable cost of acquisition. The appeal by the Revenue was dismissed, and the assessee's appeal was allowed, determining the receipt as not chargeable to tax.

---

---

Issues Involved:

1. Taxability of the sum received on the assignment of know-how.
2. Classification of the receipt as either capital gain or business income.
3. Applicability of Section 55(2) versus Section 41(3) of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Taxability of the Sum Received on Assignment of Know-How

The primary issue revolves around whether the sum of Rs. 5,25,00,000 received by the assessee for the assignment of know-how should be taxed. The assessee claimed this amount as exempt, treating it as a capital receipt. The Assessing Officer (AO) taxed the amount under Section 41(3) of the Income Tax Act, while the Commissioner of Income Tax (Appeals) [CIT(A)] held it taxable under Section 55(2) as a capital gain.

Issue 2: Classification of the Receipt as Either Capital Gain or Business Income

The Revenue argued that the receipt should be classified as business income since the know-how was developed through the assessee's regular R&D activities, for which expenses were already claimed in the Profit & Loss Account. The CIT(A) disagreed, stating that the know-how was a self-generated capital asset and not an asset acquired from outside sources. Therefore, it could not be treated as revenue income under Section 41(3). Instead, the CIT(A) classified it as a capital gain under Section 55(2), with the cost of acquisition deemed as Nil.

Issue 3: Applicability of Section 55(2) Versus Section 41(3) of the Income Tax Act

The CIT(A) and the Tribunal reviewed the terms of the agreement dated 26.10.2005 between the assessee and BSV Research and Development Pvt. Ltd. The CIT(A) concluded that the transaction was for commercial exploitation, thus falling under the purview of Section 55(2). However, the Tribunal noted that the know-how was under development and did not confer any manufacturing rights. Therefore, it could not be equated with a right to manufacture as contemplated by Section 55(2)(a). The Tribunal cited the Supreme Court's rulings in CIT Vs. B.C. Srinivasa Setty and CIT Vs. D.P. Sandu Bros. (Chembur) Pvt. Ltd., emphasizing that where the cost of acquisition of an asset is not ascertainable, the computation mechanism for capital gains fails, and thus, the receipt cannot be taxed as capital gains.

Conclusion:

The Tribunal concluded that the know-how under development was a self-generated asset with no ascertainable cost of acquisition. Consequently, the Rs. 5,25,00,000 received could not be brought to tax under the head 'capital gains.' The appeal filed by the Revenue was dismissed, and the appeal of the assessee was allowed, holding that the receipt was a capital receipt not chargeable to tax.

Order Pronounced:

The order was pronounced in the open court on 24/05/2019.

---