1995 (7) TMI 146 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of income and taxability of Rs. 12,50,000.
2. Method of accounting (accrual vs. receipt basis).
3. Jurisdiction under Section 263.
4. Rate of tax applicable to the income.

Issue-wise Detailed Analysis:

1. Accrual of Income and Taxability of Rs. 12,50,000:
The primary issue was whether the income of Rs. 12,50,000 had accrued to the foreign company and was thus taxable in the assessment year 1984-85. The CIT held that the income accrued in India and was taxable under Section 5(2)(b), despite the foreign company's claim that the income should be taxed on a receipt basis. The Tribunal concluded that no income had in fact accrued to the foreign company, as the agreement between the Indian and foreign companies was rescinded ab initio, and the project did not proceed. Consequently, there was no right to receive the payment, and thus, no income to be taxed.

2. Method of Accounting (Accrual vs. Receipt Basis):
The foreign company had consistently declared its income on a receipt basis. The CIT directed that the income should be taxed on an accrual basis, which was challenged by the foreign company. The Tribunal found that the method of accounting could not be changed for part of the income for the same year. The foreign company's income on a receipt basis exceeded the disputed amount, and thus, the assessment order was not prejudicial to the revenue. Therefore, the method of accounting should remain consistent, and the income should not be taxed on an accrual basis.

3. Jurisdiction under Section 263:
The CIT initiated proceedings under Section 263, claiming the assessment order was erroneous and prejudicial to the revenue. The Tribunal found that the CIT did not record a post-hearing finding that the assessment order was erroneous and prejudicial to the revenue. The foreign company had been offering its income on a receipt basis, and the CIT did not consider the non-accounting of Rs. 12,50,000 in the context of other income accounted for on that basis. Thus, the Tribunal quashed the CIT's order due to this procedural deficiency.

4. Rate of Tax Applicable to the Income:
The dispute also involved the rate of tax applicable to the income of Rs. 12,50,000. The CIT(A) held that the proper rate was 20% under Section 115A(1)(b)(ii)(1), while the Assessing Officer had taxed it at 40%. The Tribunal agreed with the CIT(A) that the income, if taxable, should be taxed at 20% as it was a lump sum payment for know-how transferred outside India. The Tribunal also noted that the payment was not for outright sale but for the right to use technical know-how, thus constituting royalty.

Conclusion:
The Tribunal concluded that the income of Rs. 12,50,000 had not accrued to the foreign company and was not taxable in the assessment year 1984-85. The method of accounting should remain on a receipt basis, and the CIT's order under Section 263 was quashed due to procedural deficiencies. If the income were taxable, the appropriate rate would be 20%. The foreign company's appeal was allowed, and the department's appeal was dismissed.