1996 (8) TMI 147 - AT - Income Tax

Additions To Income, Assessing Officer, Assessment Year, Capital Receipt, Central Excise, Closing Stock, Manufacture And Sale, Revenue Receipt

Summary

Issues Involved:
1. Nature of the receipt of Rs. 3,00,000 (capital or revenue).
2. Addition of Rs. 50,000 due to undervaluation of closing stock.

Issue-wise Detailed Analysis:

1. Nature of the Receipt of Rs. 3,00,000 (Capital or Revenue):

Facts and Background:
The assessee, a private limited company engaged in manufacturing and selling geysers, air-coolers, and washing machines under the brand name 'ELEKTRO', entered into an agreement with M/s. Elektro Flame Ltd. The agreement involved surrendering exclusive know-how, technical information, and marketing assistance, including the brand name 'ELEKTRO'. The assessee received Rs. 2,00,000 for this surrender and Rs. 1,00,000 for guaranteeing a quantum of sales. The assessee treated the receipt as capital, while the Assessing Officer and CIT(A) treated it as revenue.

CIT(A) Observations:
The CIT(A) viewed the agreement as a colorable device, noting that the assessee commenced production in November 1983 and entered into the agreement in November 1984, a short period to build significant technical expertise and goodwill. The CIT(A) also highlighted inconsistencies in the agreements and lease deeds, suggesting they were not genuinely intended to transfer ownership or rights.

Assessee's Arguments:
The assessee contended that the sum of Rs. 3 lakhs was a capital receipt, emphasizing the restrictive covenant in the agreement and the technical know-how provided. The assessee relied on several judicial precedents to argue that the receipt was capital in nature.

Tribunal's Analysis:
The Tribunal noted that the CIT(A) doubted the genuineness of the agreement for the first time and based his conclusions on suspicions and conjectures. The Tribunal found no material to substantiate the CIT(A)'s finding that the agreement was a colorable device. The Tribunal agreed with the assessee that the agreement was genuine and acted upon, and the parties were not sister concerns.

Judicial Precedents:
The Tribunal referred to various Supreme Court and High Court decisions, which held that compensation for surrendering technical know-how and restrictive covenants is of capital nature. The Tribunal concluded that the first part of Rs. 2 lakhs for surrendering the brand name and technical know-how is a capital receipt. However, the second part of Rs. 1 lakh for guaranteeing a turnover was considered a revenue receipt, assessable in the year under appeal.

Conclusion:
The Tribunal held that Rs. 2 lakhs is a capital receipt not assessable to tax, while Rs. 1 lakh is a revenue receipt, assessable in the year under appeal. The assessee's grounds were allowed in part.

2. Addition of Rs. 50,000 Due to Undervaluation of Closing Stock:

Facts and Background:
The Assessing Officer made an addition of Rs. 50,000 due to the assessee's failure to provide Central Excise records, which were taken away by excise authorities. The CIT(A) confirmed the addition based on the tax audit report, which noted the absence of proper records.

Assessee's Arguments:
The assessee contended that there was no discrepancy in the stock as verified by an Inspector from the Central Excise office. However, this aspect was not considered by the Assessing Officer or the CIT(A).

Tribunal's Analysis:
The Tribunal found that neither the Assessing Officer nor the CIT(A) considered the Inspector's verification report. The Tribunal decided to set aside the CIT(A)'s order and remand the issue to the Assessing Officer to re-examine the matter in light of the Inspector's report and after giving the assessee an opportunity to be heard.

Conclusion:
The Tribunal directed the Assessing Officer to take a fresh decision on the addition of Rs. 50,000 after considering the Inspector's report and providing the assessee with an opportunity to be heard.

Final Outcome:
The assessee's appeal was allowed in part for statistical purposes.