TaxTMI 
TaxTMI 
2007 (11) TMI 324
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....s engaged in the business of manufacturing of bulk drugs and formulation of pharmaceutical products, which are sold both in domestic and export market. In addition, the assessee was also marketing a Nitro Glycerine based product named 'Angispan TR', manufactured by another company named 'Sidmak Laboratories India Ltd.' In the course of assessment proceedings, it was noticed by the Assessing Officer that there was a credit entry of Rs. 6 crores in the Profit and Loss A/c on account of receipt for transfer of marketing and clinical data and allied rights. In the computation of income filed along with the return of income, the assessee company claimed deduction in respect of the above receipt on the ground that it was a capital receipt not chargeable to tax. In the note No. 13 to the computation of total income, the assessee explained as under: "During the year the company has entered into agreement with US Vitamin Ltd. The company shall not compete with US Vitamin Ltd. directly or indirectly or through it affiliates in the promoting, distribution and selling activities of formulation made from the bulk drug nitro glycerine. The company has received consideration sum of Rs. 6 crore....
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....sed the above scientific and marketing know-how, develop/generated in the course of business to the USV. In addition to transfer of above know-how, Lyka was also restricted from making available/assigning the said information to a third party for a period of 3 years. Further for a period of 5 years Lyka or its affiliates are restricted from competing with USV in the sale and distribution of formulation made from nitro glycerine or having the same as its main ingredient." 4. The contention of the assessee before the Assessing Officer was that the above information and data was a self-generated asset with no cost and therefore the amount received by the assessee for giving up such asset was in the nature of capital receipt not chargeable to tax. Reliance was placed on the Supreme Court judgment in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. It was also contended that there was non-compete clause in the agreement and therefore the consideration for the same also amounted to capital receipt in view of the Supreme Court judgment in the cases of Gillanders Arbuthnot& Co. Ltd. v. CIT [1964] 53 ITR 283 and CIT v. Best & Co.(P.) Ltd. [1966] 60 ITR 11. Reliance was also....
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....is on the licence basis, then the receipt would be Revenue in nature. (iv) That the definition of income in section 2(24) of the Income-tax Act ('the Act') is an inclusive definition which would include any receipt which can properly be described as income. Relial1ce was placed on the Supreme Court judgment in the case of CIT v. G.R. Kartikeyan [1993] 201 ITR 866. In view of the above reasons, it was held by him that the sum of Rs. 6 crores received by the assessee was Revenue receipt chargeable to tax. Accordingly, the addition was made. 6. The matter was carried in appeal before the learned CIT(A) before whom following submissions were made: (i) that marketing information and knowledge developed by the assessee during the course of its engagements in the business, constituted a self-generated asset. Therefore, the consideration received was a capital receipt not chargeable to tax; (ii) even assuming that capital receipt is chargeable to tax under section 45 of the Act under the head 'Capital gains', the capital gain cannot be computed inasmuch as no cost was incurred in acquiring such asset as it was a self-generated asset and therefore no income can be brought to tax....
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.... selling agent as claimed by the assessee. In view of the same, the learned CIT(A) was of the view that the amount received could not be considered as a capital receipt. It was also observed by him that marketing rights were acquired by the assessee in the normal course of business with the help of its marketing staff and thus expenditure had been incurred in acquiring such rights. Consequently, it would be taxable under the head 'Capital gain' even assuming it to be capital receipt. The addition made by the Assessing Officer was therefore upheld. Aggrieved by the same, the assessee is in appeal before the Tribunal. 8. The learned Counsel for the assessee has reiterated the stand of the assessee before the Assessing Officer as well as learned CIT(A) and therefore, the same need not be repeated. However, he has also relied on the decision of the Tribunal in the case of PL. Chemical Ltd. v. Asstt. CIT [2003] 86 ITD 46 (Mad.) as well as the decision of Calcutta High Court in the case of CIT v. A.S. Wardekar [2006] 283 ITR 432. On the other hand, the learned D.R. has also reiterated the reasonings given by the Assessing Officer as well as learned CIT(A) and therefore, the same need ....
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....ise in ethical promotion of the formulation and is in the possession of valuable market information pertaining thereto; and D. USV is also engaged in the business of manufacturing, marketing and distributing inter alia various cardiac products and desires to expand its market, increase its market share and expand its activities in the field of Nitro glycerine based Formulations; and E. At the request of USV and for the consideration mentioned herein, LYKA has agreed to provide to USV the aforesaid clinical data, scientific details, reports on clinical trials carried on by LYKA in the last few years, valuable market information more particularly set out in the Schedule hereunder written (hereinafter referred to as the Scientific and Marketing Know-how); and F. LYKA has represented that it is not restrained under any law or contract to disclose the aforesaid clinical data, scientific details, reports on clinical trials carried on by LYKA in the last past few years and the valuable market information. Now this agreement witnesseth and it is hereby agreed by and between the parties hereto as under: 1. On or before 28-2-1998 LYKA shall supply and provide to USV clinical data....
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....cal data, Scientific details and reports on clinical trails carried out by LYKA in respect of the Formulations based on the bulk drug Nitroglycerine. (b) Source of manufacture of Formulations from the bulk drug Nitroglycerine. (c) Break up of Statewise list of wholesalers, stockists and dealers of the Formulations. (d) Break-up of Statewise sales of Formulations for last 5 years. (e) Break-up of Statewise list of specialists, doctors, cardiologists and institutions as short listed by LYKA with respect to the Formulations referred to in the above Agreement. (f) Visual aid designs, copies of promotional material used. Sd  ....
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....ycerine and (ii) for not competing with USV in promoting, distributing and selling activities of such formulation for the period specified therein. The consideration received was composite one and no apportionment was made in respect of the above activities. 12. First we take up the issue relating to the transfer of information regarding Nitroglycerine based formulation. There is no dispute that assessee had been in the business of manufacturing of various drugs and formulations and sale thereof as well as marketing of Nitroglycerine based formulations known as 'Angispan TR' manufactured by Sidmak Laboratories India Ltd. Further, it had a huge distribution network for marketing its own manufactured product as well as product manufactured by other parties. In the course of such business, it came to possess certain marketing information relating to Nitroglycerine based formulation. USV was manufacturer of Nitroglycerine based formulation, who, intended to market its product in India. To facilitate its marketing process, it entered into an agreement with the assessee to procure certain information relating to Nitroglycerine based formulations subject to the obligation of the assess....
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....and the assessee is also prohibited to use the same, then it would be a case of transfer of capital asset and the consideration would be a capital receipt. The dispossession of the asset in the manner mentioned above, in our opinion, is a condition precedent for constituting the receipt as capital receipt. Reliance can be placed on the judgment of House of Lords in the case of Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580. In that case, assessee possessed technical knowledge/know-how. The same were sold to various parties. The question arose whether consideration received by the assessee was capital or revenue receipt. The Court held that assessee was not parting with its asset but was trading in them. Hence the receipt was held to be revenue receipt. Reliance can also be placed on the judgment in the case of British Dye Stuffs Corpn. (Black lay) Ltd. v. IRC 12 Tax cases 586 wherein the test laid down was 'is the transaction in substance a parting by the assessee with part of its properties for a purchase price, or is it a method of trading by which the assessee acquires money as part of its profits and gains of that trade'. Thus, as per both the decision....
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....as complete sale of know-how and assessee could not either use or sell to others while in the present case, the assessee had simply passed the information for a period of three years and the assessee was not prohibited to use the same in its own marketing business and further could transfer the same after 3 years. Hence, that decision is quite distinguishable. 17. The decision of the Tribunal in the case of Balkrishna v. Doshi is not applicable since in that case the question was whether there was any cost for acquiring know-how. This decision would be applicable only when it is held that there is transfer of capital asset. Since in the present case, it has been held that there is no transfer of capital asset, that decision is inapplicable. For the similar reasons, the decision of the Tribunal in the case of Chander Mohan cannot be applied to the facts of the present case. Moreover, in that case, it was sale of Patent which is not the case before us. 18. In view of the above discussions, it is held that imparting of information relating to marketing of Nitroglycerine formulation for a period of 3 years did not amount to transfer of capital asset and on the contrary it was a c....
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.... was a loss of Rs. 1,70,22,528 on account of not showing interest income on accrued basis in respect of three parties as under: Antibiotics Stores Ltd. Rs. 1,07,98,248 Pharmawell Center Rs. 27,74,156 Krishna Sales Corporation Rs. 33,59,081 Miscellaneous Parties Rs. 91,043 --------------- Rs. 1,70,22,528 --------------- The explanation before the Assessing Officer was that the debtors had disputed the debit notes w....
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....ssessee could hot follow the different methods, i.e., mercantile system in respect of interest paid and cash system in respect of interest to be received. Therefore, the interest income was chargeable to tax on accrual basis since the assessee was following mercantile system of accounting for all other purposes. It was also observed by him that assessee can claim such income as bad debt in the subsequent years on account of non-recovery. Aggrieved by the same, the assessee is in appeal before the Tribunal. 25. Both the parties have been heard. The contention of the learned Counsel for the assessee remains the same as contended before the learned CIT(A). According to him, the sundry debtors had disputed the debit notes of interest issued by the assessee and therefore to avoid the practical difficulties the assessee switched over to cash system of accounting. Since the change in the method of accounting was bona fide and followed consistently, it was contended that addition was not justified. Reliance was also placed on the judgments cited before the learned CIT(A). On the other hand, the learned D.R. has relied upon the order of learned CIT(A). 26. After hearing both the parti....
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....ounting only in respect of interest income is not permissible in view of the amended provisions. Perhaps, one can contend successfully that assessee is permitted to change the method of accounting either from mercantile to cash system or vice versa for bona fide reasons. But in our opinion, assessee cannot be permitted to contend that a part of income can be booked on mercantile basis while the other part of income on cash system of accounting. Therefore, considering the amended provisions of section 145, we do not find any merit in the ground raised by the assessee on this issue. The order of the learned CIT(A) is therefore upheld on this issue. 27. Ground No. 3 raised by the assessee reads as under: "3. The learned CIT(A) erred in confirming the addition of Rs. 13,50,000 being interest at the rate of 18 per cent on deposit of Rs. 45,00,000 (out of total deposit of Rs. 75,00,000) being deposit kept with the director for providing him rent free accommodation as per the terms of his appointment." Briefly stated the facts are that assessee had given interest free deposits of Rs. 75 lakhs to Mr. N.I. Gandhi, Managing Director of the company. The Assessing Officer noticed that....