1937 (6) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the transaction between Khem Chand and the Company.
2. Taxability of the annual payment of Rs. 4,500.
3. Applicability of Section 4(3)(vii) of the Income Tax Act for exemption.

Issue-Wise Detailed Analysis:

1. Nature of the Transaction:
The primary issue was determining whether the transaction between Khem Chand and the Company was an out-and-out sale of the patent or merely a working license. The agreement dated 5th March 1934 was scrutinized to ascertain the true nature of the transaction.

- Key Points:
- The agreement was described as a "licence" and the payment as "royalty."
- Paragraphs 3, 4, 6, 7, 9, and 16 indicated that Khem Chand did not completely transfer ownership of the patent to the Company.
- The agreement's duration was tied to the expiry of the patents, which could be extended, making the total payment uncertain.
- Khem Chand retained ownership of any improvements made to the strainers during the agreement's term.
- The Company had the option to continue using the patent even after the expiry of the Tej Patent, subject to certain conditions.

The court concluded that the transaction was not an outright sale but rather a grant of a working license for an uncertain period, with the property in the patent remaining with Khem Chand.

2. Taxability of the Annual Payment:
The assessee contended that the annual payment of Rs. 4,500 was a capital receipt and not taxable income. The Income Tax Officer and the Assistant Commissioner treated it as a fixed royalty and taxable income.

- Key Points:
- The court noted that if the transaction were a sale for a fixed sum payable in instalments, the payments would be capital receipts and exempt from tax.
- However, since the agreement was for an uncertain period and the payment was not a fixed sum, it was considered a recurring royalty.
- The court referred to the case of Scoble v. The Secretary of State in Council for India, which established that payments spread over time for the use of a property are taxable as income.

The court held that the annual payment of Rs. 4,500 was "income, profits, and gains" and thus taxable.

3. Applicability of Section 4(3)(vii) for Exemption:
The assessee claimed exemption under Section 4(3)(vii) of the Income Tax Act, arguing that the receipt was a capital receipt and not taxable income.

- Key Points:
- Section 4(3)(vii) exempts "casual" or "non-recurring" receipts from tax.
- The court found that the annual payment was neither casual nor non-recurring, as it was a regular payment for the use of the patent.
- The court cited the case of Constantinesco v. Rex, where it was held that payments for the use of an invention over time are taxable as income.

The court concluded that the receipt was not exempt under Section 4(3)(vii) as it was a recurring payment.

Conclusion:
The court answered the question against the assessee, holding that the annual receipt of Rs. 4,500 under the agreement was "income, profits, and gains" and not exempt from assessment under Section 4(3)(vii) of the Income Tax Act. The parties were left to bear their own costs.