TaxTMI 
TaxTMI 
2006 (7) TMI 244
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....e", as accretions during the year. Note-7 to Schedule 17 to the Balance Sheet reads as under: "Advance of Japanese Yen 2,80,00,000 paid to Dai-ichi Kogyo Seiyaku Company Ltd., Japan towards technical know-how fees has been valued at TT selling rate of Rs. 100 J.Y. 367.5 as on 31-3-1993 and the difference has been transferred to Capital Reserve Account." In the course of assessment proceedings for the assessment year 1993-94, it was explained by the assessee as under: ". . . that a sum of 28 million Japanese Yen equivalent to Rs. 26,07,751 was paid by the assessee-company to M/s. Dai Ichi Kogyo Seiyaku Company Limited, Japan (hereinafter referred to as "DKS") in the years 1986 and 1988 on account of technical know-how fees and the same was shown in the books of account as capital work-in-progress. . . . the said remittance was revalued at the exchange rate prevailing as on 31-3-1993 and the re-valued amount arrived at Rs. 76,19,048, which resulted into capital appreciation of Rs. 50,11,297. . . . since there was only a notional gain, the amount has been credited as "Capital Reserve" in the books of account. It was, accordingly, submitted that since there was no actual....
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....hus, during the year the amount became recoverable by the assessee from DKS and the same was to be disbursed by "DIGCIL". No actual payment could be received by the assessee from DIGCIL till the end of the year. In the books of account, the assessee passed following entries at the end of the year: Debit KDS Rs.76,19,048 Credit Capital work Rs.26,07,751 -in-progress Credit Capital Rs.50,11,297 Reserve --------------------------------------------------------- Rs.76,19,048 ....
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....se of carrying on business and, therefore, the same was chargeable to tax under section 28(iv) of the Act in the assessment year 1993-94 inasmuch as assessee was maintaining its books on mercantile basis. He further was of the view that the above sum was nothing but compensation for the earlier period and may be treated as interest chargeable to tax. He also opined that entries in the books of account were not relevant in determining the nature of income. Accordingly, he included the above sum in the total income of assessee by assessing under the head "Profits & gains of business". 7. On appeal, the learned CIT(A) examined the material on record and held as under: "1. The original agreement dated 5-12-1985 also does not stipulate payment of interest or any compensation to the appellant in case of DKS decides not to transfer the technical knowhow. It is, therefore, incorrect and also illogical to allege that the excess amount of Rs. 50,11,237 represent interest on earlier payments of Rs. 26,07,751 made by the appellant to DKS. 2. It cannot be said that the appellant was holding, on capital account, a sum of 28 million Japanese Yen in its bank account. The appellant did not....
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....e sum of Rs. 50,11,297 is chargeable in the appellant's hands as "capital gains" and since the right to technical know-how was with the appellant for more than 36 months, the same should be charged as "long-term capital gains". 6. Since the tripartite agreement dated 3-4-1992 was taken on record by Indian Government on 10-5-1993 and engineering documents were thereafter handed over by assessee, the transfer became effective on 10-5-1993 and, therefore, capital gain was chargeable to tax in assessment year 1994-95." In view of the above findings, the learned CIT(A) deleted the addition vide order dated 29-4-1997. 8. The assessment for assessment year 1994-95 was originally made under section 143(1)(a) but subsequently reopened under section 148 by issue of notice under section 148 on 25-7-1997. The Assessing Officer again examined the above issue and held that the amount received by assessee was taxable under section 28(iv) of the Act. However, this time he worked out the income at Rs. 58,62,649 considering the rate of exchange as on 31-3-1994. On appeal, the learned CIT(A) observed as under: "But I would agree with the AR that when as a measure of abundant caution the A....
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....ross-Objection for the assessment year 1993-94 raising following objections: "A. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in holding that the sum of Rs. 50,11,297 be taxed as long-term capital gains in the assessment year 1994-95. B. The learned CIT(A) has failed to appreciate that it was beyond his jurisdiction to give directions for a previous year which was not before him and, therefore, the directions so made be deleted. C. Without prejudice to the aforementioned, the learned CIT(A) failed to appreciate that during the relevant previous year, there was no transfer and, therefore, the question of levying capital gains could not be determined either for the relevant previous year and or for any subsequent year. D. Without prejudice to the same, the learned CIT(A) failed to appreciate that even if capital gains have to be computed after taking the enhanced cost and the indexation, the assessee would have suffered a loss and, therefore, the observations or directions given for computing capital in assessment year 1994-95 was bad in law." 10. Both the parties have been heard at length. The....
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....lied by the revenue is distinguishable on facts since payment related to commission being on revenue account. Our attention was also drawn to the terms of the agreement to contend that assessee had acquired the ownership rights in drawings, designs, documentation, etc., and, thus, payment was on capital account. It is pointed out that there is no clause for return of such documents and, therefore, it is wrong to contend that the same were given to assessee only for use thereof. It is also submitted that on account of cancellation of the earlier agreement, the advance paid ceased to be advance for acquiring technical know-how and became a loan simpliciter and, therefore, gain on account of fluctuation in exchange rate must be held to be on capital account. Reliance was also placed on the judgment of the Apex Court in the case of Scientific Engg. (P.) Ltd. v. CIT [1986] 157 ITR 86 for the proposition that acquisition of drawings, designs, etc., amount to acquisition of "Plant" under section 43 of the Act and, therefore, assessee is entitled to depreciation. This itself shows that payment for acquiring such items is on capital account. Reliance was also placed on the judgment of the S....
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....to pay for capital goods, the first step to the acquisition of capital goods. The surplus attributable to $ 36,123 was capital accretion and not profit taxable in the hands of the assessee." A perusal of the above reveals that this judgment is an authority for the proposition that if the foreign currency is held for purchase of capital goods, then surplus on account of fluctuation in exchange rate would be capital receipt. 13. The next judgment of the Apex Court is Sutlej Cotton Mills Ltd.'s case. Their Lordships, after referring to various judgments including the one referred to in the preceding para, held as under: "The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading aspect or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would b....
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.... pursuant to ARTICLE 3, ARTICLE 4 and ARTICLE 6 hereof for the construction and operation of DIK's PLANT in the MANUFACTURING TERRITORY. (2) A non-exclusive license to sell PAAm, produced by the DIK's PLANT in the SALES TERRITORY. 2.2 DIK should be free to sub-license, the DKS PROPRIETARY INFORMATION to another Indian party, should it become necessary. The terms of such sub-licensing will, however, be as mutually agreed to by all the parties concerned including DKS and will be subject to the approval of INDIAN GOVERNMENT. 2.3 DIK shall not use any trademark and/or trade name of DKS concerning PAAm. Article 3 - ENGINEERING DOCUMENT 3.1 Within 90 (ninety) A combined reading of the above provisions of the agreement shows that it was not a case of outright purchase of technology. The gist of the agreement shows that it was a case of transfer of technology for use by assessee in setting up of the unit as well as in the process of manufacture. This inference is because of the following facts in the agreement: (i) The preamble itself states that DKS only granted license to use the technology; (ii) Article 12 provides that agreement shall be in force till the royalt....
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....rks Co, Ltd. v. CIT [1989] 177 ITR 377. In that. case, the company was engaged in the business of manufacturing of antibiotics and pharmaceuticals. The company, with a view to increase the yield, entered into and agreement with Japanese company for supply of know-how for its use in the manufacturing process against lump sum payment. The question arose whether the payment was on revenue account or capital account. Their Lordships held that since use of know-how was in the course of existing business of manufacturing of medicines, the payment was on revenue account. The other judgment is reported as Jonas Woodhead & Sons (India) Ltd. v. CIT [1997] 224 ITR 342(SC). In that case also, the technical know-how was obtained for use by assessee but it was to be used in setting up of the plant. Their Lordships of the Apex Court, after considering various judgments including in the case of Alembic Chemical Works Co. Ltd., held that payment was on capital account. The relevant portion of the judgment is extracted below: "But in the case in hand the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign ....
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....bove have already been reproduced in earlier part of the order). The combined reading of the above Articles shows that payments for drawings, designs, etc., as well as for services rendered related to setting up of the plant. Only the royalty based on net sales could be said to be related to technology for manufacturing process. Hence, we are of the view that payment of 28 million Yens was intended for setting up of the plant and, therefore, was on capital account. Thus, income arising on account of fluctuation in exchange rate, in our humble opinion, was capital receipt in view of the Supreme Court judgment in the case of Jonas Woodhead & Sons (India) Ltd. 17. Having held that payment was on capital account and the gain on account of fluctuation in exchange rate was capital receipt, the question of assessing the same as benefit arising from business under section 28(iv) of the Act does not arise. Unless the benefit, if any, is on revenue account, the same cannot be assessed as business income under section 28. Apart from the above discussion, the payment received in cash would not fall within the ambit of the word "benefit" as held by the Hon'ble Supreme Court in the case of Ma....
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....treatment of the technical information disclosed to DIK by DKS under the Original Licensing Agreement and above-said lump sum paid to DKS by DIK thereunder." 19. In view of the above, all rights and obligations under the original agreement got vanished and in turn assessee was required to return the design and drawings and DKS was required to refund 28 million Japanese Yen. It was only a case of refund of same amount in Japanese currency which on conversion resulted in gain to assessee. Thus, in our opinion, there was no transfer of any capital asset and consequently refund of the original amount was simply a capital receipt not chargeable to tax. 20. In view of the above finding, the question regarding the year of taxability does not survive. The answer to such question is merely academic one. However, to avoid the future litigation, we proceed to answer the same. The original agreement was cancelled on 3-4-1992 by the new agreement which is in two parts. The first part cancels the original agreement between DKS and assessee. The second part is between DKS and the new formed company - DIGCIL for supply of know-how and technical assistance. It is the second part which require....
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....full without restricting them to the limit prescribed under section 37(2A). 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 7,83,013 made to the closing stock on account of unutilised modvat credit. 4. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the Assessing Officer should allow assessee's claim of royalty of Rs. 29,79,784. 5. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of loans advanced by the assessee to its sister concerns out of interest bearing borrowings. 6. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in allowing assessee's claim for deduction of bad debt of Rs. 3,34,915 ignoring the fact that a substantial part of the loan amounting to Rs. 3,28,373 was recovered in the assessment year 1994-95 proving the fact that bad debt claimed during the year had not actually become bad in the said year. 7. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that in order to allow the claim ....