1989 (6) TMI 82 - AT - Income Tax

Summary

Issues:
- Disallowance of Rs. 2,55,000 on account of unaccrued liability of technical know-how fees.
- Interpretation of the agreement regarding the payment of the 3rd installment.
- Disregarding the timing of liability for the 3rd installment.

Analysis:
1. The Revenue appealed against the CIT (A) order concerning the disallowance of Rs. 2,55,000 for unaccrued liability of technical know-how fees for the asst. Yr. 1980-81.

2. The firm entered into a technical collaboration agreement with a foreign company for the supply of technical know-how for manufacturing machines. The agreement specified payment terms, including a lump sum amount and subsequent recurring fees.

3. The assessing authority initially disallowed Rs. 2,55,000 of the total technical know-how fees, citing that this amount was payable upon the commencement of commercial production and had not yet accrued during the relevant year.

4. The CIT (A) held that under the Mercantile System of accounting followed by the assessee, the entire liability of Rs. 7,65,000 had accrued during the relevant year when the agreement was executed and approved, thus allowing the deduction.

5. The Departmental Representative contended that the liability for the 3rd installment of technical know-how fees would only accrue upon the commencement of commercial production, supporting the restoration of the disallowed amount.

6. The authorized representative for the assessee argued that the liability for the entire sum accrued during the relevant year, as per the Mercantile System of accounting, citing relevant case law to support their position.

7. The Tribunal considered the nature of the liability, the terms of the agreement, and the accounting method used by the assessee. It upheld the CIT (A) decision to delete the disallowance, emphasizing that the liability had accrued during the relevant year, regardless of deferred payment terms.

8. Referring to a Bombay High Court judgment, the Tribunal concluded that the entire amount of liability should be deductible in the year it accrued, supporting the deletion of the disallowance.

9. Consequently, the appeal by the Revenue was dismissed, affirming the decision to delete the disallowance of Rs. 2,55,000 on account of unaccrued liability of technical know-how fees.