1988 (8) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 6,08,117 to the total income of the assessee.
2. Income recognition for the supply, erection, and commissioning of 3 motor-driven pumping sets.
3. Allowance of Rs. 95,602 as revenue expenditure for obtaining license rights from an Italian concern.

Detailed Analysis:

1. Addition of Rs. 6,08,117 to the Total Income of the Assessee:
The primary issue revolves around the addition of Rs. 6,08,117 by the Income Tax Officer (ITO) to the total income of the assessee. The ITO contended that the sales of auxiliary parts of 20 pump sets to Obra Thermal Power Station should be treated as sales, regardless of whether the pumping set supply was complete and operational. The contention was that income arose when the parts were dispatched, invoices were raised, and the price was collected.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's decision, rejecting the assessee's argument that income should only accrue after the complete erection and commissioning of the pump sets. The assessee's counsel relied on a previous Tribunal decision and argued that the contract terms indicated that the pumping sets remained the property of the assessee until fully erected and tested. The Departmental Representative, while acknowledging the identical facts, argued for a different interpretation, emphasizing that the properties passed to the customer upon dispatch and collection of price.

Upon review, the Tribunal accepted the assessee's contention, noting that the contract required not just the supply but also the erection and commissioning of the pump sets. The Tribunal concluded that the property in the pumping sets passed to the customer only upon successful erection and commissioning, thus the amounts received for auxiliary parts did not represent sale prices. Consequently, the addition of Rs. 6,08,117 was deleted, with a direction to the assessing officer to verify and include income for any pump set commissioned during the relevant year.

2. Income Recognition for the Supply, Erection, and Commissioning of 3 Motor-Driven Pumping Sets:
The second issue concerned a contract with the Corporation of Calcutta for the supply, erection, and commissioning of 3 motor-driven pumping sets. This contract was initially revoked but later reinstated with modifications. The Tribunal noted that this contract was also of a turnkey nature, similar to the Obra Thermal Power Station contract. Income would only accrue upon successful commissioning and handover of the pumping sets to the customer.

The Tribunal directed the assessing officer to verify the commissioning dates of the pump sets to determine if any income should be included in the relevant assessment year.

3. Allowance of Rs. 95,602 as Revenue Expenditure:
The final issue involved the allowance of Rs. 95,602 as revenue expenditure for obtaining license rights from an Italian concern. The ITO had disallowed this expenditure, but the CIT(A) allowed it, considering it as revenue expenditure for improving the quality of butterfly valves manufactured by the assessee.

The Departmental Representative argued that the payment was for acquiring technical know-how, which should be treated as a capital expenditure. However, the Tribunal noted that the agreement provided only license rights for the use of technical know-how, designs, and patents, and included continuous support from the Italian company. The Tribunal concluded that the expenditure was of a revenue nature, as it did not result in the acquisition of a capital asset but rather facilitated the use of technical know-how. Thus, the CIT(A)'s decision to allow the expenditure was upheld.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the addition of Rs. 6,08,117 and directing verification for income recognition related to the commissioning of pumping sets. The Tribunal also upheld the allowance of Rs. 95,602 as revenue expenditure, dismissing the Revenue's appeal.