2009 (7) TMI 899 - HC - Income Tax

Whether Tribunal was justified in declining to admit the additional ground regarding charging of interest under section 234B of Income-tax Act, 1961 Held that - it is pure question of law - It was a plea, which could be allowed to be raised by the assessee in their appeal before the Tribunal notwithstanding the fact that it was not raised by them before the lower authorities - Tribunal was not justified when it did not allow the assessee to admit the additional ground in their memo of appeal and to urge the same in their appeal regarding charging of interest under section 234B of the Income-tax Act before the Tribunal Whether a receipt is capital or income - payment made by the foreign collaborator to the assessee - foreign collaborator had granted to the assessee non-exclusive right to use the technical know-how - non-exclusive licence was granted to the assessee on payment of Rs. 20 lakhs in three instalments and on payment of recurring royalty on annual basis for three years Held that - it was essentially in the nature of compensation paid to the assessee to adjust the relations between the parties, which had become strained on account of committing breaches by the parties as against each other in execution of the agreement. If the original agreements did not create any capital asset or advantage of enduring nature in favour of the assessee due to several restrictions and limitations in the agreement while using the technical know-how then as necessary corollary consequent upon termination of such agreement, the amount received by the assessee from their foreign collaborator too did not create any asset of capital nature nor created advantage of enduring nature in favour of the assessee so as to entitle the assessee to claim exemption from payment of tax on the said sum as capital receipt. Contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect, it differs from an agency agreement it is revenue receipt in the hands of the assessee and was liable to be assessed as revenue receipt. Mercantile system of accounting - accrual of income - held that - since in this case a right to receive accrued to the assessee on November 22, 1991, which also included a right to receive even the second instalment and hence, its taxability in the hands of the assessee could not be postponed till the date of its actual receipt, i.e., up to November 30, 1992. In other words, it had to be taxed in the hands of the assessee as if received on November 22, 1991, i.e., the date on which agreement was executed. Since, this date fell in the assessment year 1992-93 and hence, it was rightly taxed by the Assessing Officer in the assessment year 1992-93.

Issues Involved:
1. Admissibility of additional ground regarding charging of interest under section 234B.
2. Nature of compensation received by the assessee and its taxability.
3. Accrual of income and the appropriate assessment year for taxability.
4. Entitlement to deduction under section 80HH and section 80-I.

Detailed Analysis:

1. Admissibility of Additional Ground Regarding Charging of Interest under Section 234B:

The Tribunal was not justified in declining to admit the additional ground regarding charging of interest under section 234B of the Income-tax Act, 1961. The Supreme Court decisions in Jute Corporation of India Ltd. v. CIT and National Thermal Power Co. Ltd. v. CIT clarified that appellate authorities have the power to entertain additional grounds not raised before lower authorities. The Tribunal should have allowed the assessee to raise the plea of charging interest under section 234B as it involved a pure question of law that could be decided on admitted facts without additional evidence. Consequently, question No. 1 was answered in favor of the assessee and against the Revenue.

2. Nature of Compensation Received by the Assessee and Its Taxability:

The Tribunal was justified in concluding that the compensation of Rs. 5,18,62,396 received by the assessee constituted a revenue receipt and is liable to be assessed as such. The compensation received was in the ordinary course of business and did not create any capital asset or advantage of enduring nature for the assessee. The agreements did not grant exclusive rights, and the payments were more in the nature of adjustments between the parties rather than compensation for the loss of a capital asset. The Supreme Court decisions in CIT v. South India Pictures Ltd. and CIT v. Rai Bahadur Jairam Valji supported this view, distinguishing between capital and revenue receipts based on the nature of the agreement and the context of the payments. Thus, question No. 2 was answered against the assessee and in favor of the Revenue.

3. Accrual of Income and the Appropriate Assessment Year for Taxability:

The Tribunal was correct in holding that the amount of Rs. 2,19,50,782 accrued to the assessee in the assessment year 1992-93 and was rightly brought to tax in that year. The assessee followed the mercantile system of accounting, under which income is recognized when the right to receive it accrues, not necessarily when it is actually received. The agreement dated November 22, 1991, created a right to receive the total sum of Rs. 5,18,62,396, including the second installment, which accrued in the assessment year 1992-93. Therefore, the entire amount was taxable in that year. The Supreme Court's explanation of the mercantile system in Morvi Industries Ltd. v. CIT supported this conclusion. Hence, question No. 3 was answered against the assessee and in favor of the Revenue.

4. Entitlement to Deduction under Section 80HH and Section 80-I:

The question regarding the entitlement to deduction under section 80HH and section 80-I was not answered as it was deemed unnecessary by the learned counsel for the assessee.

Conclusion:

1. Question No. 1: Answered in favor of the assessee and against the Revenue.
2. Question No. 2: Answered against the assessee and in favor of the Revenue.
3. Question No. 3: Answered against the assessee and in favor of the Revenue.
4. Question No. 4: Not answered.

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