2007 (8) TMI 261 - HC - Income Tax

When consideration is received for imparting know-how in association with the disposal of capital asset then receipt will have to be treated as a capital receipt agreement make it clear that there has been parting of an asset along with know-how and the transferee has not retained any right in itself in the said transferred assets and on the contrary has agreed not to carry on further business in the manufacture or design consideration received is a capital receipt not revenue receipt

Summary

Issues Involved:
1. Whether the lumpsum of Rs.5 lakhs was a revenue receipt.
2. Whether the receipt in the hands of the payee has to be treated as revenue receipt based on the payer's treatment of the payment.

Detailed Analysis:

Issue 1: Whether the lumpsum of Rs.5 lakhs was a revenue receipt.

The applicant, a registered firm, entered into an agreement on 22-12-1977 for the sale of five different models of boilers and fuel firing equipment, including technical data and manufacturing processes, for a total consideration of Rs.5,00,000/-. The agreement included clauses that the applicant would not engage in the manufacture of these models or any other type of boilers (Clause 2.2) and assured that the models sold were the only ones of their kind developed by the firm (Clause 3.4).

The assessing officer initially concluded that the receipt was not a capital receipt but a revenue receipt, as it involved the use of the assessee's expertise and know-how in a commercial sense. The Commissioner (Appeals) later held that the amount was a capital receipt, considering it was for the sale of the entire boiler technology and system, not just the sale profits of the five models.

The Income Tax Appellate Tribunal (ITAT) reversed this decision, stating that the agreement did not preclude the assessee from engaging in other activities related to designing, manufacturing, and selling oil burners, and thus held the receipt as a revenue receipt.

The court examined various judgments, including Commissioner of Income Tax V/s. Ralliwolf Limited and Commissioner of Income Tax V/s. Automobile Products of India, to determine the nature of the receipt. It was noted that the nature of the transaction and the context of the receipts are crucial in deciding whether they are capital or revenue receipts. If the know-how transfer is part of the disposal of a capital asset, it is treated as a capital receipt. In this case, the applicant firm transferred five models and technical know-how, agreeing not to engage in related manufacturing, indicating a complete disposal of the asset.

The court concluded that the transaction involved parting with an asset along with know-how, with no retained rights, thus making the receipt a capital receipt. Therefore, the lumpsum of Rs.5 lakhs was not a revenue receipt.

Issue 2: Whether the receipt in the hands of the payee has to be treated as revenue receipt based on the payer's treatment of the payment.

The court considered the argument that since the payment was not resulting in the acquisition of any capital asset or enduring advantage for the payer, it should be treated as a revenue receipt for the payee. However, the court emphasized that the nature of the receipt in the hands of the payee depends on the transaction's substance and the agreement's terms.

The court referred to the judgment in CIT V/s. Ciba of India Limited, which clarified that the nature of the receipt as capital or revenue is not determined solely by the payer's treatment of the payment. Instead, it depends on whether the transaction involves the disposal of a capital asset or the provision of services. In this case, the agreement involved a complete transfer of the models and know-how, with the applicant agreeing not to compete in the related business, indicating a capital receipt.

Conclusion:

The court held that the receipt of Rs.5,00,000/- was a capital receipt, not a revenue receipt. The questions referred were answered in the negative, in favor of the assessee and against the revenue. The reference was disposed of accordingly.