1986 (11) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of royalty income under the agreements for the assessment years 1980-81 and 1981-82.
2. Method of accounting for royalty income.
3. Deduction under section 80VV of the Income-tax Act, 1961.

Detailed Analysis:

1. Taxability of Royalty Income under the Agreements for the Assessment Years 1980-81 and 1981-82:

The primary issue was whether the royalty income received by the assessee, a non-resident company, under two agreements with Hindustan Aeronautics Ltd. (HAL) was taxable in India. The agreements involved the transfer of technical know-how and licensing for manufacturing fuel injection equipment. The payments were made in sterling to a bank in England. The Income-tax Officer (IAC) included these amounts in the assessment for 1980-81, contending that the transfer of technical information and payments occurred in India.

The Commissioner (Appeals) upheld the inclusion, asserting that the amounts were taxable under section 9(1)(vi) of the Income-tax Act, 1961, rejecting the assessee's claim that the case was covered by the proviso to this section.

The Tribunal analyzed whether the royalty amounts were taxable on an accrual or payment basis. It was established that the payments were made outside India, and hence, section 5(2)(a) did not apply. The Tribunal also noted that the technical information and data were likely sent by post, making the post office an agent of HAL, thus implying delivery outside India. Consequently, the income could not be deemed to have accrued or arisen in India under section 5(2)(b) and section 9(1)(vi).

The Tribunal concluded that the royalty income was covered by the proviso to section 9(1)(vi), as the agreements were made before 1-4-1976 and were presumably approved by the Central Government. Therefore, the inclusion of these amounts was not proper, and the additions were deleted.

2. Method of Accounting for Royalty Income:

The assessee contended that it followed the cash system of accounting and thus the income should be taxed on a receipt basis. The assessing authority and the Commissioner (Appeals) rejected this contention, relying on section 5(2)(b), which allows taxation on an accrual basis, and relevant case law.

The Tribunal upheld the decision, stating that under section 5(2)(b), income of a non-resident can be taxed on an accrual basis, regardless of the method of accounting. The grounds raised by the assessee in both appeals for the assessment years 1980-81 and 1981-82 were rejected.

3. Deduction under Section 80VV of the Income-tax Act, 1961:

The revenue appealed against the Commissioner (Appeals) decision to grant deduction under section 80VV against business income rather than income from other sources. The Commissioner (Appeals) followed the Special Bench decision in the case of Allied Chemical Corpn. v. IAC, which allowed the deduction against any head of income, as there was no provision in the Act prohibiting it.

The Tribunal found the view taken by the Commissioner (Appeals) to be proper and rejected the revenue's ground in both appeals.

Conclusion:
The Tribunal allowed the assessee's appeal for the assessment year 1980-81 in part, deleted the additions related to the royalty income, and upheld the method of accounting and deduction under section 80VV. The assessee's appeal for 1981-82 and the revenue's appeals were dismissed.