1998 (12) TMI 66 - HC - Income Tax

Summary

Issues involved:
The issue involves the deductibility of a sum paid as know-how fees to a foreign collaborator by the assessee for the assessment year 1977-78.

Summary of Judgment:

The Tribunal had to decide whether the sum of Rs. 89,722 paid as know-how fees to the foreign collaborator by the assessee was an allowable expenditure for the assessment year in question. The Assessing Officer disallowed the deduction as the liability to pay had arisen in the previous year, and the assessee was maintaining accounts on a mercantile basis. The Commissioner of Income-tax (Appeals) also rejected the plea, stating that as the assessee did not provide for tax liability in the year it accrued, no deduction could be claimed for the subsequent year of actual payment. The Tribunal held that the liability did not accrue due to provisions of the Foreign Exchange Regulation Act, making it contingent until permission was granted by the Reserve Bank of India. However, the Tribunal erred in assuming that the Commissioner of Income-tax (Appeals) found the appellant followed a cash system of accounting.

The Tribunal failed to distinguish between the accrual of liability and the procedure required for payment under the Foreign Exchange Regulation Act. The liability to pay know-how fees arises under the collaboration agreements, independent of FERA provisions. The FERA's purpose is to regulate foreign exchange payments, not control obligations under valid contracts. The liability to pay accrues independently of the payment procedure prescribed by law. The Tribunal's decision was erroneous as it considered the liability contingent when it had accrued in the previous year.

Referring to a relevant case, the court emphasized that the liability to pay the fee for technical know-how accrued under the agreement, and the requirement for permission did not make it contingent. The court held that the Tribunal erred in allowing the deduction, as the liability was not contingent but had crystallized in the previous year. The question was answered in favor of the Revenue and against the assessee, who did not appear in court.

In conclusion, the court clarified the distinction between contingent and crystallized liabilities, emphasizing that the liability to pay the know-how fees was not contingent on obtaining permission but had accrued under the agreement. The Tribunal's decision to allow the deduction was overturned, ruling in favor of the Revenue.