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TMI Blog1999 (4) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... . These patents were thereafter further assigned by CMERI to NRDC, in terms of the standing agreement between CSIR and NRDC, for commercial exploitation. The NRDC in turn gave right to use above know-how to M/s. Punjab Tractors Ltd. against payment of a lump sum and royalty. In the meantime, assessee joined the said Punjab Tractors as Executive Director w.e.f. 27-6-1970. Thus, when assessee patents were assigned to CMERI in August, 1970, he was employed in Punjab Tractors Ltd. During the years under appeal, the assessee received a sum of Rs. 45,432 and Rs. 68,221 as royalty from CMERI, Durgapur and claimed this to be capital receipt. This was assessed by the then IAC(Assessment) as income from other sources. On appeal, the predecessor CIT(A) restored the matter to the file of the DCIT for adjudication afresh after affording proper opportunity to the assessee to substantiate its claim of non-taxability of royalty receipt. The assessee reiterated its claim that the royalty received was in consideration of a capital asset, i.e. patented invention by the assessee and, accordingly was not taxable in view of the judgment of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty, [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right in fact belonged to the organisation. The components invented/developed by the assessee did belong to the organisation which was spending huge amount on its research and development, nevertheless the concern did pay him certain amount in lieu of his contributions. In this view of the matter, we are of the firm opinion that the amount received by the assessee was not capital receipt and was rightly assessed as income of the assessee from 'other sources'. The CIT(A) has fallen in error in accepting the contention of the assessee. Accordingly, the orders of the CIT(A) for both the years under consideration are reversed and those of the Assessing Officer are restored. 7. In result, both the appeals of the revenue are allowed. Per Bali - I have gone through the order proposed by my ld. brother but I am unable to agree with his reasoning as well as conclusion and for that I give my reasons and related facts as under. 2. Hearing in these two appeals in the case of the assessee Shri Chander Mohan who is the Managing Director of the Punjab Tractors Ltd. took place on 22-10-1996 and the appeals for allotted to my ld. colleague, the Judicial Member, for dictation, who has pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et aside the issue with regard to the taxability of Rs. 45,342 to the file of the Assessing Officer for fresh adjudication and to consider the explanation offered by the assessee in terms of the letter dated 10-2-1971 from the Council of Scientific and Industrial Research to CMERI indicating the sealing of the patent No. 113115 dated 10-11-1967 on 15-10-1969 in favour of inventors S/Shri Chander Mohan, Gursharan Singh Rihal, and Balbir Singh Devgun together with the letter dated 27-5-1970 from M/s. L.S. Davar Co. (Patent Attorneys) to PSIDC stipulating that they have searched about the patents assigned by CMERI to PSIDC and then to Punjab Tractors Ltd and came to the conclusion that they were not infringing any existing patents. The Assessing Officer was also directed to consider the assignment of the patents in favour of CSIR as well as subsequent assignment to Commissioner of Patent, USA and to authority in Germany. Thereafter the Assessing Officer passed a fresh order dated 6-3-1989. Therein the Assessing Officer held that since the assessee was working as a Scientist with CMERI and during his tenure as a Scientist he invented certain tractor components. These had necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloped by the assessee did belong to the organization which was spending huge amounts on research and development and that organisation had paid the assessee certain amounts in lieu of his contribution. Accordingly my ld. brother held that the amount received by the assessee was not capital receipt and was rightly assessed as income of the assessee from other sources. 7. On these facts, I am of the opinion that the conclusion arrived at by my ld. brother is not correct because a patent is a capital asset. Patent royalties are payments, periodic or in lump sum, made for the user or assignment of a patent. Royalties for the user, past, present or future, of a patent agree taxable as income where there is a working licence and the transaction does not amount to an exclusive licence affecting the capital rights of the patentee. In the present case, the patentee is the CMERI and the income by way of royalty in lump sum or periodical, is assessable only in the hands of the patentee and not in the hands of the assessee because the assessee assigned the patent rights irrevocably to CSIR/CMERI for which he had received certain amounts in the two assessment years under consideration and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference of opinion between the Members who heard these appeals, the following point of difference is referred to the Hon'ble President for the opinion of the third Member:- Whether, on the facts and in the circumstances of the case, the amounts of Rs. 45,342 and Rs. 68,221 received from CMERI on account of invention of tractor components for asstt. years 1983-84 and 1984-85 are taxable in the hands of the assessee as held by the Judicial Member or the order of the ld. CIT(A) deleting these amounts from the income of the assessee should be confirmed as held by the Accountant Member? THIRD MEMBER ORDER 1. On a difference of opinion between the Members constituting the Division Bench, the following point of difference has been referred to me by the Hon'ble President acting under section 255(4) of the Income-tax Act, 1961:- "Whether, on the facts and in the circumstances of the case, the amounts of Rs. 45,342 and Rs. 68,221 received from CMERI on account of invention of tractor components for asstt. years 1983-84 and 1984-85 are taxable in the hands of the assessee as held by the Judicial Member or the order of the ld CIT(A) deleting these amounts from the income of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 9-10-1986 relating to assessment year 1983-84 restored the matter back to the file of the Assessing Officer for fresh adjudication asking him to consider the explanation offered by the assessee in terms of a letter dated 10-2-1971 from the CSIR to CMERI indicating the sealing of the Patent dated 10th November, 1967 on 15th October, 1969 in favour of the three inventors which included the assessee and a letter dated 27-5-1970 from M/s. L.S. Davar Co. (Patent Attorneys) to PSIDC. The Assessing Officer passed a fresh order on 6-3-1989 wherein he held that since the assessee was working as a Scientist with CMERI and during his tenure he had invented certain tractor components, these necessarily had to be assigned to the parent organisation for which the said organisation was incurring huge expenditure. According to the Assessing Officer the assessee may not have incurred any expenditure for the invention but the organisation for which he was working as a Scientist had incurred huge amount and it was for this reason only that the patent was ultimately assigned to the organisation which in turn subsequently transferred the patent rights to M/s. Punjab Tractors Ltd. in which the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Revenue Commrs. (1948) 16 ITR (Suppl.) 57, Commrs. of Inland v. Sangter [1919] 12 Tax Cas. 208, Brandwood v. Banker [1929] 14 TC 44, Handley Page v. Butterworth [1933-35] 19 TC 329, Wild v. Ionides [1925] 9 TC 392 and Anant Ram Khem Chand v. CIT [1937] 5 ITR 511. Such royalties would be income even though paid in a lump sum, Mills v. Jones [1929] 14 TC 769. If the owner of a patent sells it or grants an exclusive licence to another whereby he is prevented from exercising his capital patent rights the royalty payment would in the recipient's hands be a capital receipt, Collins v. The Firth-Brearley Stainless Steel Syndicate Ltd [1925] 9 TC 520. Anant Ram Khem Chand v. CIT [1937] 5 ITR 511. Even in patent rights are parted with only for a limited period, a limited type of customer or a limited area, the payment would still be a capital receipt, Margerison Tyresoles Ltd. [1941] 25 TC 59 Withers v. Nethersole [1948] 16 ITR (Suppl.) 92. In Anant Ram Khem Chand v. CIT [1937] 5 ITR 511, the assessee was the patentee of a tube-well boring strainer called the Khem Patent. The assessee granted to a company "full licence and authority to make", strainers according to the specification of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been treated as capital gains, the IAC in his directions under section 144B had accepted the assessee's submission. Therefore, no capital gains tax could be levied on the sale of self-generated goodwill or technical know-how." 2.7 The second decision before the Bombay Bench of the Tribunal, amongst other things, the assessee transferred technical know-how to a subsidiary company for a consideration of Rs. 2 lacs. It was held that no capital gains was chargeable to tax for the transfer of technical know-how, which was a self-generated asset. 2.8 In the third case before the I.T.A.T., Delhi Bench, it was held that consideration for surrender of tenancy rights was not taxable in view of Delhi High Court judgment in Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 because tenancy right was a capital asset acquired without payment of any money and, as such, section 45 was not attracted. 2.9 In the light of the above discussion, my conclusion is that the appellant acquired patent rights without any cost of acquisition to himself; he did not lease/licence patents to CMERI or any other party, on the contrary, he assigned the patent rights irrevocably to CMERI, a Central Government Lab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received certain amounts in the two assessment years under consideration and the assessee had no residual interest in the patent after such assignment. 3. The consideration received by the assessee on account of such irrevocable assignment of patent which was a capital assets was in the nature of a capital receipt and, therefore, not taxable in view of the judgment of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty. 4. The assessee along with two other co-inventors acquired patent rights in respect of the invention of tractor components without any cost of acquisition to himself or to his other co-inventors. 5. He did not lease/license these patents to CMERI/CSIR or any other party; on the contrary, he along with his two other co-inventors assigned the patent rights irrevocably to CMERI, a Central Government Laboratory. It was clear that the assessee along with his two colleagues alienated the ownership of the property rights in the patents once and for all and since the patent was a capital asset, any consideration on its transfer was on capital account and taxable only under sections 45 to 48. 6. In view of the decision of the Hon'ble Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he did not become the owner thereof at any stage. I may, however, mention that this last argument cannot be considered as this was never raised by any of the tax authorities or even considered by the ld. Members of the Division Bench. The ld. counsel for the assessee, on the other hand, stated that there was no evidence or proof with the department about the quantum of expenditure allegedly incurred by the Govt. institution for purposes of enabling the assessee to carry out the research leading to the invention and this aspect had proceeded entirely on presumptions and assumptions both in the order of the Assessing Officer and the opinion of the ld. Judicial Member. The further submission was to the effect that the assessee was an employee of the institution and conducting research was not a part of the terms of appointment. Further, a patent was a capital asset and the same had been assigned irrevocably by the respondent to the Government institution and any receipt consequential thereto was a capital receipt and not a revenue receipt as held by the ld. Judicial Member confirming the view of the Assessing Officer to the same effect. In support of the various arguments the ld. coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted that the rights of invention were patented and assigned by the assessee to his employer i.e. CMERI in August, 1970 and it was only as a result of such assignment the CMERI became the exclusive owner of the rights under various Patent numbers. In spite of such a finding of fact one really cannot understand as to how a conclusion can be arrived at that the amounts received by the assessee were of a revenue nature. The ld. Judicial Member, who wrote the initial order, has not made any comment on the order of the CIT(A) which is a very-well reasoned order taking into account all the facts and the law on the subject. The distinction between assignment of a patent irrevocably and receiving some amount thereto and allowing user of the patent without an irrevocable assignment was not considered by the ld. Judicial Member but his aspect of the matter has duly taken note of by the ld. Accountant Member in his dissenting order. As rightly held by the ld. Accountant Member, the patent rights were acquired by the respondent and two others in respect of invention of tractor components without any cost of acquisition and these were not leased or licensed to CMERI/CSIR or any other party but ..... X X X X Extracts X X X X X X X X Extracts X X X X
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