Just a moment...

Report
FeedbackReport
×

By creating an account you can:

Logo TaxTMI
>
Feedback/Report an Error
Email :
Please provide your email address so we can follow up on your feedback.
Category :
Description :
Min 15 characters0/2000
TMI Blog
Home / RSS

2009 (7) TMI 899

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....crued to the assessee in the assessment year 1992-93 and was rightly brought to tax in the said assessment year ?        4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the compensation amount of Rs.5,18,02,396 could not be said to be income derived from an industrial activity and as such the assessee is not entitled to deduction under section 80HH and section 80-I of the Income-tax Act ?"   2. Heard Mr. G. M. Chafekar, learned senior counsel with Shri D. S. Kale, learned counsel for the assessee and Mr. R. L. Jain, learned senior counsel with Ms. Veena Mandlik, learned counsel for the Revenue.   3. At the outset, learned counsel for the parties brought to our notice rather conceded that so far as question No. 1 is concerned, the same has to be answered in favour of the assessee and against the Revenue in the light of two decisions of the Supreme Court reported in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 (SC) and National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC).   4. In Jute Corporation of India Ltd. [1991] 187 ITR 688 (SC), their Lord- ships, while ex....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....tifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also."   6. In these two cases, their Lordships have held that even if a particular question was not raised before the lower authorities but was raised for the first time in appeal either before the Commissioner of Income-tax (Appeals) or before the Tribunal, the same can be allowed to be raised by the appellate authorities in appropriate cases.   7. Coming now to the facts of this case in so far as they relate to question No. 1, it is noticed that the Tribunal did not allow the assessee to raise one additional ground regarding charging of interest under section 234B of the Act in their appeal on the ground that the same was not raised before the lower authorities. As a con....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ment year 1992-93 and was rightly brought to tax in the said assessment year ?"   11. The dispute in this reference relates to the assessment year 1992-93.   12. The assessee is a limited company engaged in the business of manufacture of tyres and tubes as also business of trading of fabrics.   13. The promoters of the assessee-company on September 30, 1985, applied to the Government of India (Department of Industrial Development) seeking permission to enter into foreign collaboration with one foreign company by name M/s. Michelin France for manufacture of tyres and tubes for scooters and motorcycles. The Government of India, vide their letter dated June 12, 1986, granted approval to the assessee on certain conditions. The approval apart from several conditions also contained the following additional conditions :   Namely :      (1) Royalty- 3% subject to taxes for a period of five years.      (2) Lump sum know-how fee- Rs. 20 lakhs subject to taxes      (3) Duration of agreement shall be for a period of 8 years from the date of agreement filed with the RBI. 14. Consequent upon the grant of appr....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

.... 17. Clause 8 provides for termination of agreement. Clause 8.1 says that the agreement shall expire automatically as set forth in clause 7. Clause 8.2 provides that the agreement shall automatically terminate if foreign collaboration agreement is terminated for any reason. Clause 8.2 lays down the procedure for termination of term. Clause 8.6 provides that the agreement shall automatically terminate in the event there is a change in the ownership or control of agency.   18. Clause 9 stipulates the consequence upon termination ; clause 9.1 provides that in the event of termination, M/s. Michelin shall cease to transfer the technical know-how. It also puts restriction on the assessee that they shall abide by the confidentiality clause for two years from the date of termination of agreement in relation to procedure set out in clause 4. Clause 9.2 provides that termination shall not relieve the assessee from any liability arising from their unauthorised use or disclosure of technical know-how. Clause 9.3 provides that in the event of termination of agreement for any breach by the assessee, it shall not be relieved from payment of any obligation.   19. Clause 10 provides f....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....and distribution of its products or in any other way with respect to its operation and business.   23. In terms of clause 1.4, the assessee was to receive a sum of U.S. $ 1,91,08,000 = U. S. $ 1,11,08,000 + U.S. $ 8,00,000 (U. S. Dollars) from Michelin in two instalments.        1. 5-12-1991 U. S. $ 1,11,08,000        2. 30-11-1992 U. S. $ 8,00,000   24. The clause also provided that if first payment is not received by due date then the assessee shall have an option of considering the settlement as null and void so also M/s. Michelin shall have a right to waive claims, against the assessee arising directly or indirectly from the agreement.   25. The clause 1.5 provides that payment would be made in escrow account and shall not be realized until legal opinion confirming the execution of agreement is obtained. Clause 2 provides that assessee would return all confidential information to M/s. Michelin by November 30, 1992.   26. On December 31, 1992, the assessee filed a return for the assessment year 1992-93. In this return, the assessee declared to have received the first payment of U.S. $ 1,11,08,000, i.e., ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....dited to the profit and loss account as capital gains not liable to tax. This is what the assessee said in return in support of their claim :        "The company during the year has received US $ 8,00,000 from Companies General Des Establishment, Michelin, its technical collaborators as per the agreement dated November 22, 1991, equivalent to Indian Rs. 2,29,50,782. The said amount has been credited to the profit and loss account under the head "miscellaneous receipt". The aforesaid amount has been received for agreeing not to disclose or transfer the technical information received from Michelin to any third party and not to refer it towards Michelin or to any trade marks, trade names and logo owned or used by Michelin or its affiliates, to the agreements or to the sources of the technology received by the assessee-company from Michelin in the manufacture, sale, marketing and distribution of its products or in any other way with respect to its operations and business. The company claims that the amount of Rs.2,29,50,782 towards the above agreement is a capital receipt and, therefore, not liable to tax. However, as a matter of abundant caution and to avoid ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....fore, held that the amount received by the assessee is in fact not on account of termination of any right but it was in the nature of damages received by the assessee in the course of its business activity. He held that what is received by the assessee is pursuant to a trade contract because the assessee did not suffer any injury on their capital asset. It is for this reason, the amount received in two instalments amounts to revenue receipt thereby exigible to tax in the hands of the assessee.   31. The assessee felt aggrieved of the appellate order of the Commissioner of Income-tax (Appeals) filed further appeal to the Tribunal. By well reasoned order (annexure C), the Tribunal too concurred with the findings of the Assessing Officer and the Commissioner of Income-tax (Appeals) and accordingly, confirmed the findings on this issue. It is against this order, the assessee prayed for making a reference to this court on the questions proposed. However, the Tribunal acceded to prayer made by the assessee and accordingly, made this reference under section 256(1) of the Act to this court on the aforementioned questions.   32. Learned counsel for the assessee in substance so f....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....d. entered into an agreement terminating the contracts in consideration of payment of Rs. 26,000 as compensation to the assessee. The question having been raised whether this was a capital or revenue receipt, the Supreme Court held that it was latter, i.e., revenue receipt and was thus, liable to be taxed.   38. Their Lordships, speaking through the learned Chief Justice S. R. Das, examined the facts in the light of the English decisions and with his distinctive style of writing, held as under (page 915) :      "It is not always easy to decide whether a particular payment received by a person is his income or whether it is to be regarded as his capital receipt. Income, said Lord Wright in Raja Bahadur Kamak- shya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC) is a word of the broadest connotation and difficult and perhaps impossible to define in any precise general formula. Lord Macmillan said in Van Den Berghs Ltd. v. Clark (H. M. Inspector of Taxes) [1935] 3 ITR (E.C.) 17 (HL) that though in general the distinction between an income and a capital receipt was well recognized and easily applied, cases did arise where the item lay on the borderline ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....hese three agreements did not radically or at all affect or alter the structure of the assessee's business. Indeed the assessee's business of distribution of films proceeded apace not withstanding the cancellation of these three agreements."   40. In conclusion, the learned Chief Justice summed up the issue as follows (page 919) :        "In the premises the amount received by the assessee was only so received 'towards commission', that is to say, as compensation for the loss of the commission which it would have earned had the agree- ments not been terminated. In our opinion, in the events that had happened, the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed or sterilized but in the language of Rowlatt J. in Short Bros.' case [1927] 12 Tax Case 955 the amount was simply received by the assessee in the course of its going distributing agency business from that going business. In our judgment, on the facts and in the circumstances of the present case, it falls within the principles laid down in Short Bros.' case [1927] 12 Tax Case 955 and Kelsall Parsons and Co.'s cases [1938] 21 TC 608 rath....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....12 years. Pursuant to this agreement, the I. I. S. company paid a sum of Rs. 2,50,000 to the asses- see as also the unpaid balance.   42. On these facts, the question arose before the taxing authorities as to whether the sum of Rs. 2,50,000 received by the assessee was a capital receipt or revenue in his hands.   43. It is this question, which was examined by their Lordships in the context of legal principle governing the field. The learned judge Venkatarama Aiyar, speaking for the Bench, posed a question in the following words (page 152) :        "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ing parties agree to carry on busi- ness in the sale and purchase of goods for a stated period on terms settled between them, or whether they enter into a succession of contracts for that purpose ?"   Further, his Lordship ruled (page 163) :        "In our opinion, therefore, when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect, it differs from an agency agreement."   45. In conclusion, his Lordship held the payment to be in the nature of revenue receipt in the hands of the assessee. This is what his Lordship ruled (page 167) :        "In the present case, the contract dated May 9, 1940, was simply an agreement to carry on business. In settlement of that contract, Rs.2,50,000 was paid to the respondent. That was not a payment on account of any capital expenditure incurred by him in the execution of the contract. That indeed was the point sought to be raised by the respondent, bu....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....imited period to use patent and trade mark was given to the assessee by Michelin without parting away of any of their assets so also patent and trade mark. Seventhly, there was no restrictions on Michelin to grant licence to others in relation to business in question. Eighthly, the object of the agreement was to grant benefit of technical assistance only for running the business of manufacture and sale of tyres and tubes and, lastly, it really did not create any right in favour of the assessee in any tangible asset to form capital assets of enduring nature in the hands of the assessee.   48. In somewhat similar facts, this issue came up for consideration before the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). In this case also, the assessee entered into an agreement with one Swiss company and acquired a right to draw for the purpose of carrying on its business as manufacturer and dealer of pharmaceutical products, the technical knowledge of the Swiss company for a limited period. Their Lordships, while interpreting the terms of the agreement, held that by making the knowledge available, the Swiss company did not part with any assets of its bu....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....123 ITR) :        "If the transaction embodied in the agreement is looked at commercially it looks to us as nothing more than obtaining the services of a consultancy so far as the supply of know-how is concerned, and in the nature of a licence to use the trade name so far as permission to use the trade name of M/s. Daimler Benz was concerned. The payment was not, therefore, for acquisition of any capital asset. Though the production of trucks was to be continued by Telco even after the expiry of agreement, the use of the trade mark of M/s. Daimler Benz could not be used by Telco as the licence to use the name had come to an end. So far as the payments made under the agreement were concerned, they were to be made partly in the nature of royalty and partly in the nature of share in the profit but they were only intended to secure the use of the trade name and acquire necessary know-how. Technical know-how can in no sense of the term be called a tangible asset. Mr. Moolgaonkar has clearly stated that in this case no patent rights were granted. It is not as if know-how in a technical production remains stagnant and remains the same. In the present day conditio....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

.... the production can still be continued after the expiry of the agreement is, therefore, in our view, wholly immaterial for deciding whether such know-how can be treated as a capital asset."   51. In our opinion, therefore, when we compare the terms of the agreements in question with that of the one which fell for interpretation in the aforementioned four cases before the Supreme Court and the Bombay High Court, we do not find any difficulty in holding that the assessee in this case did not acquire any capital asset or advantage of enduring nature pursuant to the agreements in question. Indeed, one can notice a substantial similarity in the terms of the agreements, which came to be interpreted by the Supreme Court and the Bombay High Court in their cases and the one which is before us. In other words, we find no difficulty in upholding the findings of all the authorities below that a sum of Rs.5,18,62,396 received by the assessee does not represent a capital asset in the hands of assessee. In our view, the amount in question was not received by the assessee against any price for relinquishment of any right in capital asset nor was it received by the assessee as price for parti....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....this submission.   53. A perusal of the decision rendered in the case of Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC) would go to show that the basic question that fell for consideration before the Supreme Court was whether documents received by the assessee from their foreign collaborator under the collaboration agreement would constitute a "book" and thus come within the term "plant" as defined under section 43(3) of the Income-tax Act for the purpose of claiming depreciation under section 32 of the Act. In other words, the question was whether such documentation, which is in the form of drawings, designs, charts, plans, processing data and other literature comprised in "documentation service" would fall within the meaning of "plant" as defined in section 43(3) of the Act and hence, can be treated as "book" for claiming depreciation under the Act. Their Lordships held it to be a book so as to fall within the meaning of the expression "plant" and, hence, entitled to claim depreciation under section 32 of the Act.   54. In our view, this case has thus no application to the facts of this case for determining the true nature of the agreement in quest....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

.... second instalment of Rs. 2,29,50,732 was concerned, which is a subject-matter of dispute in this case, the assessee received this amount on November 30, 1992, and since this date fell in the previous year relevant for the assessment year 1993-94 and, hence, it was credited to the profit and loss account by the assessee under the head "miscellaneous receipt" relevant to the assessment year 1993-94.   61. The Assessing Officer, however, discharging with the assessee's entry, brought it to tax in the assessment year 1992-93 along with the first instal- ment. It is this action of the Assessing Officer, the assessee challenged in appeal before the Commissioner of Income-tax (Appeals) unsuccessfully and later, before the Tribunal contending that since, the second instalment of Rs. 2,29,50,732 was received during the period relevant to the assess- ment year 1993-94 and, hence, the Assessing Officer was not right in tax- ing the said amount (Rs. 2,29,50,732) in the assessment year 1992-93. According to the assessee, it should have been taxed in the assessment year 1993-94 but not in the assessment year 1992-93. Since this contention of the assessee was negatived by all the three aut....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.'" 65. Applying the aforesaid principle of law to the facts of this case, we find no good ground to differ with the view taken by the lower authorities on this issue. In the first place, it is an admitted fact that the assessee follows the mercantile system of accountancy. Secondly, the agreement in question pursuant to which the assessee was to receive a total sum of Rs. 5,18,62,396 was executed on November 22, 1991. Thirdly, right to receive this sum though in two instalments on two different dates accrued to assessee immediately on execution of the agreement on November 22, 1991. Fourthly, the date of execution of the agreement, which resulted in accrual of right to receive fell in the assessment year 1992-93, i.e., previous accounting year 1991-92. Fifthly, me....