2001 (12) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs.2.50 lakhs received by the assessee is taxable as a capital receipt or a revenue receipt.
2. Whether any part of the sum of Rs.2.50 lakhs is taxable as a revenue receipt.

Summary:

Issue 1: Taxability of Rs.2.50 Lakhs as Capital Receipt or Revenue Receipt

The assessee, a well-known paper technologist, entered into an agreement with Regal Papers Ltd. for the transfer of complete technology, including technical know-how, processes, and secret formulae for manufacturing high gloss cast-coated papers and boards. The Income-tax Officer treated the sum of Rs.2.50 lakhs received by the assessee as a revenue receipt and charged it to tax. However, the Appellate Assistant Commissioner and the Tribunal upheld that the amount was a capital receipt. The Tribunal stated, "The method adopted by the assessee was not a method of trading by which the assessee acquired a particular sum of money as part of the profits and gains of the trade."

The High Court, however, disagreed, noting that the agreement was for a period of five years, and the assessee did not absolutely part with the technical know-how. The court emphasized that the agreement included a negative covenant preventing the assessee from supplying the technology to others during the agreement period and required the assessee to render services to the company. The court concluded that the receipt should be treated as a revenue receipt, stating, "The agreement has to be read as a whole. So read, it is clear that there had been no absolute parting by the assessee with his technical know-how to the company."

Issue 2: Taxability of Part of Rs.2.50 Lakhs as Revenue Receipt

The court considered whether any part of the Rs.2.50 lakhs could be treated as a revenue receipt. The Revenue argued that the transfer of professional knowledge for five years did not constitute an absolute transfer and that the assessee's services were essentially hired for this period. The court agreed, noting that the consideration was received for imparting know-how not in association with the disposal of a capital asset. The court cited various precedents, including CIT v. Ciba of India Ltd. and CIT v. British India Corporation Ltd., to support its conclusion that the receipt should be treated as a revenue receipt.

Conclusion:

The High Court answered the questions in the negative, in favor of the Revenue and against the assessee, concluding that the sum of Rs.2.50 lakhs received by the assessee should be treated as a revenue receipt.