1993 (3) TMI 129 - AT - Income Tax

Summary

Issues:
1. Classification of receipt from transfer of technical know-how as revenue or capital receipt.

Analysis:
The case involved determining whether the amount received by the assessee for the transfer of technical know-how was a revenue receipt or a capital receipt. The Income Tax Officer (ITO) treated the amount as a revenue receipt since expenses of the research section for certain years had been allowed as deductions. However, the Commissioner of Income Tax (Appeals) (CIT(A)) held it to be a capital receipt. The main issue was whether the technical know-how transferred along with the scooter manufacturing division constituted a capital asset or not.

The Appellate Tribunal analyzed the facts and held that the technical know-how was indeed a capital asset. The production had started in 1970, and the development of technical know-how over time indicated its capital nature. The Tribunal emphasized that the nature of expenses allowed as deductions by the ITO was not specified, and if they were related to salary and overhead expenses, it would not affect the classification of the receipt. The Tribunal concluded that the technical know-how was a plant asset, and the price received for its transfer was a capital receipt, not a revenue receipt.

Furthermore, the Tribunal noted that the provisions regarding capital gains were not applicable in this case due to the transfer being made to a wholly owned subsidiary, attracting exemption provisions under section 47(iv). The Tribunal also cited the principle established by the Supreme Court in a previous case to support its decision that the amount received for the transfer of technical know-how was a capital receipt.

In reference to case law, the Tribunal highlighted the distinction between revenue and capital nature of receipts from the transfer of know-how. It emphasized that when the consideration for know-how transfer is associated with the disposal of a capital asset, it is treated as a capital receipt. In this case, the technical know-how was transferred along with all capital assets, and the amount was received for the unconditional transfer of know-how, not for rendering services. The Tribunal concluded that the amount did not represent a revenue receipt, and the CIT(A) was correct in deleting the addition made by the ITO.

Ultimately, the Tribunal rejected the ground raised by the Department and dismissed the appeal, affirming the decision that the amount received for the transfer of technical know-how was a capital receipt.