Royalty from licensing commercial know-how was business income, allowing set-off against carried-forward losses.

Royalty earned under licensing arrangements for the use of technical know-how, patents, secret processes and allied commercial assets was treated as business income where the assessee retained control, restricted disclosure and continued to exploit those assets in its business. The receipt was characterised as a trading receipt rather than consideration for disposal of a capital asset, because the assessee merely allowed use of the assets and did not part with them. On that basis, the royalty was eligible to be set off against carried-forward business losses under section 24(2).

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Issues: Whether the royalty received under the agreements constituted income from business so as to be set off against carried-forward business losses under section 24(2).

Analysis: The payment arose from the assessee's use of its technical know-how, patents, secret processes and allied commercial assets through licensing arrangements with its Indian subsidiary. The arrangement did not amount to a disposal of those assets; the assessee retained control over their use, restricted disclosure, and continued to employ them as part of its business of developing, manufacturing and marketing its products. Royalty received for allowing another to use such commercial assets may constitute trading receipt where the assessee is exploiting those assets in the course of business, rather than parting with them as capital. The facts were distinguished from cases where disclosure or transfer of secret processes amounted to a capital disposal.

Conclusion: The royalty was business income and was eligible to be set off against the carried-forward business losses.

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