TMI Blog1996 (8) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... (A registered trade mark) pertaining to the manufacture of Air-Coolers, Electric Motors and Geysers. In consideration of the above, the assessee-company received a sum of Rs. 2,00,000. Further, the assessee-company received a sum of Rs. 1,00,000 towards assuring the guarantee quantum of sale for the above-mentioned appliances, as it was in the control of marketing out-lets at different parts of the country. In consideration for the same, the assessee-company was bound not to manufacture these items under the same or under any other brand name. The assessee-company treated the said receipt of Rs. 3,00,000 as of capital nature, and as such, did not offer the same for assessment. The Assessing Officer, holding that it was a revenue receipt, made addition in that behalf, while completing the assessment under section 143(3) of the Act on 29-3-1989. Aggrieved by the action the Assessing officer, assessee preferred appeal before the CIT(A), contending, inter alia, that by the agreement entered into with M/s. Elektro Flame Ltd., the assessee agreed to surrender the exclusive manufacture and right of usage of brand name 'ELEKTRO', and has also agreed necessary technical know-how in the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sical possession of the factory shed for good along with a brand name and technical know-how. Reading both these agreements of 8-11-1984 and 9-11-1984 according to him makes it abundantly clear that the assessee was only leasing the factory shed for a period of five years. He observed that when one takes note of Article 6 and Article 8 of the agreement dated 8-11-1984, whereby the assessee was to surrender the brand name, technical know-how and hand over the physical possession of the factory shed to the licensee for the consideration specified in Article 8, the lease deed dated 9-11-1984 looks to be out of place, since there was no need for a separate lease deed charging additional lease rent in respect of the factory, when the consideration of Rs. 3 lakhs received by the assessee was to take care of all the additional assistance provided by the assessee to the licensee under Article 6 of agreement. From all this, he concluded that the terms and conditions of the agreement dated 8-11-1984 have been diluted and mauled in practice, since it was evident that there was no intention on the part of the assessee to part with the ownership rights of the factory shed at 45-C, IDA, Phase I, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aracter as the fees referred to in the then section 80MM and would rightly be exigible to tax as revenue receipt. Considering all these aspects, the CIT(A) confirmed the addition of Rs. 3,00,000 made by the Assessing Officer. Hence, the assessee preferred this further appeal before us on this aspect. 5. Reiterating the contentions urged before the lower authorities, the learned counsel for the assessee contended before us that the sum of Rs. 3 lakhs received by the assessee in pursuance of the agreement dated 8-11-1984 is a capital receipt, and not a revenue receipt as held by the lower authorities. Inviting our attention to the details of the assessee-company and M/s. Elektro Flame Ltd. with regard to Board of Directors, Regd. Office and Branch Offices, Auditors and Bankers filed at pages 2 and 3 of the paper book, he submitted that the lower authorities were not justified in holding that M/s. Elektro Flame Limited is a sister concern of the assessee, and none of the directors of the assessee-company is a director in the other company, viz., M/s. Elektro Flame Limited. Inviting our attention to the copy of the agreement dated 8-11-1984 entered into by the assessee with M/s. Elek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1983] 143 ITR 720/14 Taxman 3 (Bom.) (d) R.N. Agrawala v. CIT [1960] 38 ITR 67 (Bom.) (e) CIT v. Best Co. (P.) Ltd. [1966] 60 ITR 11 (SC) (f) Gillanders Arbuthnot Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) (g) CIT v. Motor General Finance Ltd. [1959] 35 ITR 702 (Punj.) (h) CIT v. Saraswathi Publicities [1981] 132 ITR 207 (Mad.). 6. He disputed the conclusion of the first appellate authority that the agreement in question was merely a device to reduce the incidence of tax in the hands of the assessee, and for all practical purposes it was not acted upon, and there was enough material on record to support such a conclusion, stating that the said conclusion was based on mere suspicions and surmises, and the said agreement was in fact acted upon, and the other firm, M/s. Elektro Flame Ltd. is not at all a sister concern of the assessee as observed by the lower authorities. In any event, he submitted that the Assessing Officer has not at all doubted the genuineness of the agreement and the same having been acted upon, and he never doubted the same to be a colourable device to avoid the incidence of taxation in the hands of the assessee and as such he has not at all consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed at pages 17 to 20 of the paper book, and to the letter of the assessee dated 25-4-1985 addressed to M/s. Elektro Flame Pvt. Ltd., enhancing the rent for additional space at Rs. 1,000 per month from 1-5-1985. Disputing the observations of the CIT(A) that on the date on which the agreement and the lease deed were executed, the assessee had no right over the property since the assessee actually became the owner only on 25-1-1985, the learned counsel for the assessee submitted that the APIIC by its letter dated 17-11-1983 itself, addressed to IDO, Jeedimetla, a copy of which is placed at pages 23-24 of the paper-book, accepted the change of name to that of the assessee and indicated the allotment of site, and as such the observations of the CIT(A) in this behalf to the contrary, in the impugned order are incorrect. He ultimately contended that the CIT(A) merely proceeding on suspicions and surmises, doubted the genuineness of the agreement and held it to be a colourable device to avoid the incidence of taxation in the hands of the assessee, and the observations made by the CIT(A) in support of the said conclusion either with regard to the ownership of the property in question or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities, besides going through the decisions relied upon by both sides. The Assessing Officer has rejected the claim of the assessee that the receipt of Rs. 3 lakhs is of capital nature, and holding that it is of revenue nature, made the impugned addition in the order of assessment dated 29-3-1989. It is the CIT(A) in the impugned order, for the first time doubted the genuineness of the very agreement dated 8-11-1984 and the bona fides of the parties thereto while entering into the said agreement ; and proceeding on the premise that the said agreement was a mere colourable device to avoid incidence of tax in the hands of the assessee by showing the alleged capital receipt of Rs. 3 lakhs in its hands, and diverting the future trading/revenue receipts to M/s. Elektro Flame Limited, which according to him is a sister concern of the assessee. Though there is no dispute with regard to the powers of the CIT(A) entertain and proceed on such premises, even if the Assessing Officer has not looked into the matter from that angle, and it is for the first time that the CIT(A) is doubting the genuineness of the agreement, since the powers of the CIT(A) are co-terminus with that of the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee disputed each of those suspicious features pointed out by the CIT(A) and considering the contentions of the learned counsel for the assessee and the material on record, we are quite convinced that there is nothing on record to substantiate the finding of the CIT(A) that the agreement dated 8-11-1984 is a colourable device to reduce the incidence of taxation, in the hands of the assessee. The learned counsel for the assessee has explained the circumstances in which the lease dated 9-11-1984 had to be executed by the assessee, just a day later to the agreement dated 8-11-1984, and we find no reason to disbelieve the version of the assessee in that behalf. Further, the letter of APIIC dated 17-11-1983 addressed to the IDO, Jeedimetla, a copy of which is placed at page 23 of the paper book, clearly establishes the fact that changes effected in respect of plot 45-C, inter alia, from 'Aarkay Indl. Corporation to Spade Electro Private Limited, viz., from the predecessor in the said premises to the assessee, has been approved by the APIIC. The said communication, which is an inter-office memo also notes the changes in the line of business of occupiers from steel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to substantiate the finding of the CIT(A) that the agreement dated 8-11-1984 is merely a colourable device not acted upon, in our considered opinion, the CIT(A) was not justified in holding that the agreement dated 8-11-1984 is merely a colourable device to reduce the incidence of taxation in the hands of the assessee. On the contrary, the material on record clearly establishes the fact that the agreement dated 8-11-1984, and the lease deed dated 9-11-1984 have in fact been acted upon, and have been entered into by the parties which are not sister concerns, the course of their regular business. 10. Now, the question that remains to be considered is whether the consideration of Rs. 3 lakhs received by the assessee in terms of the said agreement is of capital nature as claimed by the assessee or revenue nature as held by the Assessing Officer. At this juncture, we may note that the consideration has been stipulated by the said agreement dated 8-11-1984 on page 5 thereof under article 8 thereof, which reads as under : "8.1. In consideration of the surrender of the brand name, by the licensor, the licensee shall provide to pay licensor an amount of Rs. 2 lakhs (Rupees two lakhs onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receiver receives it as income on his part, the entire receipt is taxable in the hands of the assessee." In the case of Gillanders Arbuthnot Co. Ltd., the Supreme Court, considering a case where the assessee-company carried on business in diverse lines : besides acting as managing agents, shipping agents, purchasing agents, and secretaries, and also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account, held as follows :-- "Held that having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset : they were of the nature of income. There is no immutable principle that compensation received on cancellation of an agency must be regarded as capital. Compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, that as the assessee's employment was terminated the payment made to him was not under the terms of the agreement of employment, but was made as compensation for termination of employment, and notwithstanding the fact that the assessee was being compensated for loss of employment and was also giving up all his claims against the company and binding himself to a covenant not to accept employment which may be detrimental to the interest of the company in a certain area, the payment was in the nature of capital and was not assessable in the hands of the assessee." Similarly, in the case of Saraswathi Publicities, the Madras High Court was concerned with an assessee who had secured the rights for distribution and exhibition of advertisement films, with a right to enter into agreement with other persons for distribution and exhibition, and who entered into an agreement with 'B' which had similar agreement with various firms for the purpose of seeing that the business of each other did not suffer by competition in certain States. Observing that the assessee had agreed to 'B' taking over and handling the said business from 1-4-1966 and further agreed to refrain from carrying on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et, then the receipt will have to be treated as a capital receipt." 14. In the light of the ratio laid down by the various Courts in the cases discussed above, let us now examine the nature of the receipts of the assessee in accordance with the agreement dated 8-11-1984. As regards the first part of Rs. 2 lakhs which was receivable in terms of Article 8.1 of the agreement dated 8-11-1984, extracted above, it was in consideration of the surrender of the brand name, by the licensor, and for discharging other obligations of the assessee under the agreement, associated with the said surrender of the brand name. As per Article 5 of the said agreement, the assessee, as licensor was expected to arrange transmission of technical information. The said article reads as follows :-- "5.1. The licensor confirms that the technical information that will be transmitted by the licensor under this agreement is sufficient to permit the manufacture of complete Contract Products and will enable the licensee to fulfil the objectives of this agreement. 5.2. The time and extent of the transmission of technical information and improvements will be mutually determined by the progress of the licensee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when licensor's plant for the products was in operation. In terms of Article 4, the licensor, upon mutual agreement of the parties, was to delegate to the licensee for periods to be agreed upon by the parties suitable specialists, who are required to train the personnel at the licensee's factory and to provide general technical assistance by active participation in establishing production, quality control and testing at the licensee's factory of contract products. 16. Article 6 of the agreement deals with the date of commencement of the agreement, and it reads as follows :-- "6.1 The surrender of exclusive manufacturing technical know-how for the Electrical Motors and deputation of technical personnel shall commence from the 1st day of January, 1985. The licensor however will be free to clear his present stocks till March 1985. 6.2 The surrender of brand name and trade marks for the Air Cooler and Geysers and deputation of the technical personnel shall commence from the 1st day of April, 1985. 6.3 The date of handing over the physical possession of the factory shed at 45-C, IDA, Phase-I, Jeedimetla-500 855 with the additions area more particularly described and marked in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bay High Court, as noted above, held that when consideration is received for imparting know-how in association with the disposal of a capital asset, the receipt will have to be treated as a capital receipt, though mere imparting of know-how is really in the nature of services rendered without anything more, and as such compensation received for such mere imparting would have to be treated as a revenue receipt. In the instant case, the imparting of know-how is associated with the disposal of, or at least parting with the capital assets in the form of brand name, technical information right go exclusive use of the properties of the assessee, in favour of the licensee, M/s. Elektro Flame Limited, and as such consideration relatable to the imparting of training by the assessee would also have to be treated as revenue receipt. In this view of the matter, we are of the considered opinion that the consideration of Rs. 2 lakhs in terms of Article 8.1 of the agreement dated 8-11-1984 has to be treated as a capital receipt, and the same is not liable to be assessed as the income of the assessee. 18. As regards the other part of Rs. 1 lakh, being consideration due to the assessee in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs. 1 lakh is assessable in the year under appeal alone. 19. In the light of the above discussion, we hold that the consideration of Rs. 2 lakhs relatable to the transmission of technical information, brand name, training of personnel, delegation of personnel and the restrictive covenant in the agreement restraining the assessee from carrying on manufacture of the contracted products either in the same or any other brand name either directly or indirectly, is a capital receipt not assessable to tax, whereas the other part of the consideration of Rs. 1 lakh relatable to the assessee guaranteeing a minimum turnover of Rs. 1 crore per annum to the licensee is a revenue receipt, assessable in the year under appeal. Consequently, we sustain only an addition of Rs. 1 lakh, as against Rs. 3 lakhs made by the Assessing Officer and sustained by the CIT(A) treating the entire consideration received by the assessee as a capital receipt. Assessee's grounds on this issue are thus allowed in part. 20. Assessee's next grievance in this appeal relates to an addition of Rs. 50,000 made on account of undervaluation of closing stock. The said addition was made by the Assessing Officer on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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