Accrual of income and royalty characterisation: rescinded know-how agreement created no taxability, while fixed lump-sum royalty attracted concessional rate.

Income accrues only when the assessee acquires an enforceable right to receive it; where a technical know-how agreement was mutually rescinded ab initio, the project failed and the consideration wholly failed, no real income arose and mere book entries could not create taxability. On that footing, the revision under section 263 was treated as unsustainable. Separately, a fixed consideration for limited use of technical know-how, with restrictions on disclosure and a defined term, was characterised as royalty rather than an outright sale; the instalment mode did not alter its lump sum nature, so the concessional 20% rate applied if taxable.

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Issues: (i) Whether the amount of Rs. 12,50,000 could be said to have accrued to the non-resident assessee so as to be taxable for the assessment year 1984-85 and whether the revisional order under section 263 was sustainable; (ii) Whether the amount, if taxable, was royalty in the nature of a lump sum payment chargeable at 20% under section 115A.

Issue (i): Whether the amount of Rs. 12,50,000 could be said to have accrued to the non-resident assessee so as to be taxable for the assessment year 1984-85 and whether the revisional order under section 263 was sustainable.

Analysis: The agreement between the parties had been mutually rescinded ab initio, the project had not taken off, the industrial licence had been surrendered, and the consideration for supply of technical know-how had wholly failed. In that situation, no enforceable right to receive the royalty arose in favour of the assessee and no corresponding liability to pay survived against the Indian company. Mere book entries in the payer's accounts could not create accrual where no income had in fact resulted. The revisional order also suffered from infirmity inasmuch as the Commissioner had not recorded the necessary post-hearing finding that the assessment order was erroneous and prejudicial to the interests of revenue.

Conclusion: The amount did not accrue to the assessee and could not be taxed in the relevant year. The revisional order under section 263 was unsustainable and was quashed, in favour of the assessee.

Issue (ii): Whether the amount, if taxable, was royalty in the nature of a lump sum payment chargeable at 20% under section 115A.

Analysis: The agreement showed a transfer of technical know-how for use over a limited period, with restrictions on disclosure and a fixed duration of ten years. The arrangement was therefore not an outright sale but a licence-like transfer amounting to royalty. The consideration was a fixed lump sum of Rs. 50 lakhs payable in instalments, and the instalment character did not change the nature of the payment as a lump sum. Accordingly, the lower rate applicable to lump sum royalty under the provision was attracted.

Conclusion: The amount, if taxable, was royalty in the nature of a lump sum payment and would attract tax at 20%, in favour of the assessee.

Final Conclusion: The revision was set aside, the addition of Rs. 12,50,000 was deleted, and the assessee succeeded on the main issue, while the rate question was decided in the assessee's favour as an alternative finding.

Ratio Decidendi: Income cannot be taxed on accrual unless the assessee acquires an enforceable right to receive it; where a contract is mutually rescinded ab initio and consideration fails, no real income arises, and a fixed consideration for transfer of technical know-how for use under a limited licence is royalty.

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