2001 (11) TMI 229 - AT - Income Tax

Tax Tribunal: Lump sum for technology use taxable in year of receipt. Income accrues when obligations fulfilled.

The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), ruling that the lump sum received for the assignment of the right to use ... Accrual Of Income Issues Involved:1. Taxability of the lump sum received for the assignment of the right to use technology.2. Determination of income accrual based on the method of accounting.3. Applicability of accounting standards and legal precedents in determining the accrual of income.Issue-wise Detailed Analysis:1. Taxability of the Lump Sum Received for the Assignment of the Right to Use Technology:The primary issue in this appeal is whether the entire sum of Rs. 15,68,50,000 received by the assessee for the assignment of the right to use technology for three years is taxable in the year under consideration. The assessee received this amount from Escorts Ltd. under a tripartite agreement and treated it as an advance in its books, crediting only Rs. 3,72,44,848 to the Profit and Loss account for the period from 15-7-1995 to 31-3-1996. The balance was shown as a liability and offered as income in subsequent years proportionate to the period of use. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the entire amount accrued to the assessee in the year of receipt and was taxable.2. Determination of Income Accrual Based on the Method of Accounting:The assessee argued that under Section 5(1) of the Income-tax Act, 1961, income should be recognized based on the method of accounting regularly employed, which in this case was the mercantile system. According to Accounting Standard I (AS-1) issued by the Institute of Chartered Accountants of India (ICAI), revenue and costs are recognized as they are earned or incurred, not when money is received or paid. The assessee contended that since the amount received pertained to a three-year period, only the portion attributable to the current year should be taxed. The AO, however, relied on the Supreme Court decision in E.D. Sassoon & Co. Ltd. v. CIT, which held that income accrues when the right to receive it is established, and added the balance amount to the total income.3. Applicability of Accounting Standards and Legal Precedents in Determining the Accrual of Income:The Tribunal examined the tripartite agreement and noted that the enforceable debt was created and realized by 16-8-1995, with no clause for revocation or refund. The Tribunal held that the entire amount received was taxable in the year of receipt, as all obligations were fulfilled, and no future events could affect the accrual of income. The Tribunal distinguished the case from other legal precedents cited by the assessee, such as the Punjab Tractors Co-operative Multipurpose Society Ltd., where income depended on future services, and the Madras Industrial Investment Corpn. Ltd., where expenditure was spread over years to avoid a distorted profit picture. The Tribunal concluded that the accounting entries and the method of accounting could not override the legal position that income is taxable when it accrues.Conclusion:The Tribunal upheld the CIT(A)'s order, confirming that the entire amount of Rs. 15,68,50,000 accrued to the assessee in the year under consideration and was taxable. The appeal of the assessee was dismissed.