2007 (8) TMI 368 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,35,00,000 made on account of royalty accrued as per the agreement between M/s UP Twiga Fibreglass (UPT) and the assessee.

Summary:

1. Facts and Background:
The Revenue appealed against the order of CIT(A) which deleted the addition of Rs. 1,35,00,000 made by the AO on account of royalty accrued as per the agreement between UPT and the assessee for the assessment year 1996-97. The assessee did not account for royalty income due to non-availability of necessary information and claimed it would be accounted for when ascertainable. The AO, based on the royalty agreement, calculated the royalty income for nine months from 1st April, 1995 to 31st Dec., 1995 at Rs. 1.35 crores, subject to rectification upon receipt of actual sale figures from UPT.

2. Arguments by Revenue:
The Revenue argued that the assessee followed the mercantile system of accounting, and the accrual of royalty was justified as per the agreement. The learned Departmental Representative contended that the right to receive income had accrued, and the non-receipt of the amount was irrelevant under the mercantile system.

3. Arguments by Assessee:
The assessee contended that no services were rendered, as evidenced by a suit filed by UPT claiming no technical services were provided. The matter was referred to arbitration, and no award had been issued. The assessee argued that since no amount was received, no income could be said to have been earned.

4. Tribunal's Analysis:
The Tribunal examined the royalty agreement and noted that the assessee was to provide technical support to UPT, and royalty was payable based on sales. The Tribunal emphasized that under the mercantile system, income is recognized on an accrual basis when the right to receive income is acquired. The Tribunal found that the assessee had acquired the right to receive royalty upon rendering services, and the amount became due when UPT made sales.

5. Precedents and Legal Principles:
The Tribunal distinguished the present case from the precedents cited by the assessee, such as Godhra Electricity Co. Ltd. vs. CIT and CIT vs. Hindustan Housing & Land Development Trust Ltd., noting that those cases involved hypothetical income or disputed enhancement of compensation. The Tribunal held that the royalty income accrued to the assessee as per the agreement, and the dispute raised by UPT did not affect the accrual of income.

6. Conclusion:
The Tribunal concluded that the right to royalty accrued to the assessee upon rendering services, and the amount of royalty became due upon UPT's sales. The Tribunal upheld the AO's action of taxing the royalty income and found no inconsistency in the AO's calculation, which was subject to rectification upon receipt of actual sale figures. The Tribunal overturned the CIT(A)'s order and restored the AO's action, allowing the Revenue's appeal.

7. Result:
The appeal of the Revenue was allowed.