TMI Blog1995 (7) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 was not taxed on the ground that the assessee had been declaring and would declare income by way of royalty on receipt basis. On noticing this assessment order, the CIT formed a prima facie opinion to the effect that the assessment order was erroneous insofar as it was prejudicial to the interest of revenue. He accordingly initiated proceedings under section 263, and, after having heard the assessee, passed the impugned order, the operative portion of which reads as under : " 8. In view of this legal position, I am of the considered opinion that income of Rs. 12,50,000 is required to be taxed in the assessment year 1984-85. I, accordingly direct the IAC (Asstt.) to include that amount and pass the order. 9. As far as assessee's request that IAC (Asstt.) may be directed to allow the deduction of this sum from the total income for the loss suffered by them when the contract was rescinded, I direct the IAC (Asstt.) to verify all the relevant facts concerned with the rescission of the contract and then decided the issue on merit." 3. During the course of the proceedings before the C.I.T. the assessee had made a plea and adduced evidence to the effect that the agreement dt. 30-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded in the total income of the assessee. (iv) There is no finding by the C.I.T. to the effect that the assessment order was erroneous, insofar as it was prejudicial to the interest of revenue. In the absence of such finding, the impugned order is not sustainable. (v) The C.I.T. was not correct in taking a view that the income of foreign company can be taxed only on accrual basis and not on receipt basis. 5. Sofar as the point at serial No. (i) is concerned, it was submitted by the learned counsel for the assessee that under the terms of the agreement dt. 30-12-1982, a lump sum royalty of Rs. 50 lakhs in respect of technical know-how was payable in four equal yearly instalments. The impugned instalment was the first instalment out of this lump sum. Since the collaboration agreement between the two companies had been rescinded retrospectively and since the licence was surrendered to the Government of India, the project had not made any headway. There was, thus, no amount due or payable to the foreign company and even on accrual basis the income could not be taxed in the hands of the foreign company. In support of his contention, he relied upon the decision of the Special Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under appeal even on accrual basis. At this stage, it would be pertinent to reproduce para 7.1 of the agreement dt. 30-12-1982 which reads as follows : " 7.1 In consideration of SAB transferring and supplying the technical know-how to SAL, outside the territory SAL shall pay the SAB in Sweden in Swedish Kroners a lump sum equivalent to Rs. 50 lakhs (Rupees fifty lakhs only) subject to deduction of Indian taxes, if required, in four equal instalment as follows : (a) Rs. 12,50,000 (Rupees One million, two hundred fifty thousand only) when this agreement has been taken on record by the Govern ment of India." 7. It is stated that the agreement was taken on record by the Government of India on 28-4-1983. It would be evident from the above that the 4 instalments were due and payable in consideration of the foreign company transferring and supplying to the Indian company technical know-how. Now, since the project was not found economically viable and since the two parties had rescinded the agreement ab initio and had surrendered the licence to the Government of India, there was total failure of consideration in the form of supply of technical know-how and, as such, there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of such liability could not arise. So far as the court decisions relied upon by the learned departmental representative are concerned, it would be seen that the decision of the Madras High Court in the case of Standard Triumph Motor Co. Ltd.'s which had been the basis of the passing of the impugned revisional order by the CIT has been the subject matter of appeal before the Hon'ble Supreme Court. The decision of the Supreme Court is reported in Standard Triumph Motor Co. Ltd.'s case. It is on this decision that the main reliance of the department has been placed before us. A study of this decision shows that the Supreme Court did not find it necessary to express any opinion on the question whether, as held by the Madras High Court, "(i) there was conflict or inconsistency between section 5(2) and section 145; and, (ii) in the case of a non-resident like the appellant, clause (a) of section 5(2) had no application whatsoever and clause (b) of the section governed it irrespective of the fact whether it maintained its accounts on cash basis or mercantile basis." In view of the facts before us, we also do not consider it necessary to go deeper into these questions on which the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at issue therein is distinguishable from the facts of the present case. In that case, the non-resident assessee had been filing return of its income on cash basis for the first two years on accrual basis. It was in this factual context that the Supreme Court took the view that it was not open to the assessee to change its method of accounting and that its assessments for the subsequent two years were liable to be completed on cash basis as in the earlier two years. 9. The contention at serial No. (ii) made by the learned counsel was that in view of the rescission of the agreement ab initio with the mutual consent of both the parties, there was total frustration of the contract. No consideration, therefore, passed from one party to another. It was a promissory agreement and since the foreign company had neither performed nor was it required to perform its part of the contract, the Indian company was also not obliged to perform its part and pay any cash consideration to the foreign company. There was, thus, no accrual of income to the foreign company. Since there was no real income, there could be no taxability. Reliance for this purpose was placed by the learned counsel on the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee treating amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and after the event of accrual, corroborated by appropriate entry in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about. (iii) The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. (iv) Where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income to the assessee had accrued in the respective years. The dispute in the form of court case was raised only by third parties. In the case before us, there was no dispute between the two companies. The agreement was rescinded with mutual consent. No mutual rights and obligations had arisen inasmuch as no part of the promissory contract was performed by any party. There was no pre-existing right or pre-existing liability prior to the making of entry in the books of account of the Indian company. Therefore, that entry by itself could not lead to the accrual of rights or liability on the parties. 11. As regards the points at serial Nos. (iii) (v), it was claimed by the learned counsel for the assessee, and, not disputed by the learned departmental representative that the assessee had been returning its income and was assessed on receipt basis. In the year under appeal also, the assessee had accounted for its other income on receipt basis. It was, therefore, not open to the C.I.T. to have directed that this particulars so-called income should be accounted for on accrual basis. In case the impugned direction of the C.I.T. is given effect to, it would lead to incongruity, inas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that the CIT has considered the non-accounting of the impugned income of Rs. 12,50,000 in the context of other income accounted for on that basis in the year under appeal. Thus there is no post-hearing finding by the CIT to the effect that the assessment order was prejudicial to the interest of revenue. The impugned order is, therefore, liable to be quashed on this ground also. 13. In view of the above discussion, we conclude that the impugned order of the CIT cannot be sustained. That order is, therefore, quashed. The appeal No. 804/PN/87 is allowed. ITA No. 1783/PN/88 - by assessee - A. Y. 84-85 : 14. In this appeal by the assessee, two issues have been raised. The first issue is the same as the subject-matter of the order of the CIT under section 263. Pursuant to that order, the Assessing Officer had given effect to the direction of the CIT and included the income of Rs. 12,50,000 on accrual basis in the total income of the assessee. The revised assessment order was appealed against. The learned CIT(A) has, however, refrained to adjudicate this issue on the ground that the same, subject to the decision of the Tribunal, stands concluded by the order passed under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) ought to have determined that the proportion of payment attributable to description given in clause (1) and in the balance attributable to description given in clause (1) and the balance attributable to residuary head instead of stating that the entire payment falls under clause (2). (3) The order of the CIT(A) may be vacated and that of the Assessing officer restored." 17. On this dispute, it was submitted by the learned counsel for the assessee that the lump sum payment payable in 4 equal instalments was consideration for outright sale/purchase of technical know-how and that it did not occupy the character of royalty. In other words, he made two contentions. First contention was that even though payable in instalments, it was yet a lump sum payment. The second contention was that the payment was not on account of royalty, but on account of consideration for outright sale/purchase of technical know-how. In this connection, the learned counsel referred to Article VII of the Agreement for Avoidance of Double Taxation between India and Sweden notified in G.S.R. 112, dated 23rd January, 1959. That Article reads as under : " Article VII - Royalties derived by a resident o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut only insofar as may be necessary (a) to a Director, Officer or other employee of SAL for the proper performance and discharge of the latter's duties towards SAL and (b) to SAL's contractor or sub-contractor with whom SAL has entered into an agreement or arrangement for manufacture of equipments and components required by SAL for manufacture of the products. PROVIDED that each such Director, Officer or other employee aforesaid or the contractor or sub-contractor as the case may be, prior to such disclosure having been made to him by SAL, shall have given to SAL a prior written undertaking in terms similar to those contained herein not to disclose the technical know-how or any part thereof to any other person. 4.2: Notwithstanding anything contained in this Agreement SAL shall be entitled to disclose the technical know-how or any part thereof to any third party by granting a licence or sub-licence upon the terms and conditions to be agreed upon by all the parties concerned including SAB and subject to the approval of the Government of India. 9.1 : The duration of this Agreement shall be for a period of ten years from the effective date of this Agreement." It is evident from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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