TMI Blog1937 (6) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... f August 1927 for a period of 16 years, i.e., till the 9th of August 1943. Khem Chand manufactured strainers of this patent, and used and sold them till the 20th April 1933, when he conveyed the patent rights to one Pandit Diwan Chand of Lahore for the remaining term of the patent, in consideration of Diwan Chand agreeing to pay him 10 per cent. of the net price realized on the actual sales. The arrangement continued till the 5th of March 1934, when it was cancelled by mutual consent. On that date, a tripartite agreement was entered into between the original patentee (Khem Chand), the first transferee (Diwan Chand) and a private limited company known as Reliable Water Supply Service of India Limited, Lahore, (which for brevity's sake will be called hereinafter the Company ). This Company had itself taken out a patent for another tube-well boring strainer, known as the Tej Patent , for a period of 16 years, commencing the 12th of May 1925, and had been manufacturing and selling these strainers on a large scale. In order to avoid competition by the strainers of the Khem Patent , the Company came to an arrangement with Khem Chand and his transferee Diwan Chand; and all three ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of recurring nature, paid every year for benefit derived from the patent , it was taxable profit. He accordingly dismissed the appeal. The assessee applied to the Commissioner under Section 66(2) for making a reference to the Court to decide the question of law involved, and contended that the Income Tax Officer and the Assistant Commissioner had mis-understood the real nature of the transaction which was one of sale of a capital asset, and the annual receipts were instalments of the sale price . The Commissioner has made this reference, but has expressed his opinion against the assessee's contention. He has observed that on a proper reading of the conveyance, the transaction was not one of sale , but was rightly described as a licence , on which royalty is payable annually to the assessee. He has also expressed the opinion that even if the conveyance be not regarded as a continuing licence but an outright transfer of rights once and for all, still the receipts lay properly in revenue account, being profits and gains therefrom which arose in the course of the assessee's business . With this expression of opinion, the learned Commissioner has formulated the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the meaning of the Act and assessable as such. In that event, the case would be similar to that of a speculator in immovable properties, who purchases and sells such properties as a regular trade. The profit made by him in any transaction would clearly be his taxable income. But this would not be so if a person who had inherited immovable property or had acquired it as an investment, subsequently sold it at a profit [See Californian Copper Syndicate (Limited and Reduced) v. Harris (5 Tax Cases 159), the Hudson's Bay Company Limited v. Stevens (5 Tax Cases 424) and Tebeau (Johore) Rubber Syndicate Limited v. Farmer (5 Tax Cases 658)]. The fact therefore, that Khem Chand himself had manufactured and sold strainers of this patent from 1927 to 1933 is immaterial for the decision of the point before us. Similarly the terms of his transactions with Diwan Chand can have no bearing on it. That transaction was, as pointed out by the learned Commissioner himself, a working licence for a number of years in which no fixed sum was to be paid to Khem Chand, but he was to receive a royalty on a percentage basis on the net profits made by the grantee. The amount of the royalty so received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd and the Company would expire in May 1941; but the second part keeps it alive for such further period for which an extension might be granted to either or both of the parties. Under Sec. 15 of the Act, the term of 16 years may be extended by the Governor General or the High Court, to a period not exceeding 5 years which in exceptional cases might be enlarged to 10 years. It is thus clear that the agreement would not necessarily determine in 1941; it might be kept alive for a further unknown period which may expire at any time between 1942 to 1953, during which time the Company would be liable to pay to the assessee ₹ 4,500 per annum. Obviously, it cannot be said that the transfer was for an ascertained, fixed and definite sum. Further, in paragraph 16 of the agreement it is provided that notwithstanding that the licence hereby granted ceases on the expiry of the Tej Patent, the Company shall nevertheless by giving three months' previous notice in writing to Khem Chand have the option to continue the manufacture, vend and use of the strainers as heretofore on payment of the royalty and of the sum at the rates hereinafter mentioned . Again, paragraph 7 lays down th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipally upon Collins v. The Firth Brearley Stainless Steel Syndicate, Limited (9 Tax Cases 520). In that case certain patents were assigned for a capital sum of 25,000 payable in ten equal instalments and in addition, a royalty was payable so long as the patent may survive, be it 16 years or be it a longer period . It was held that the annual instalments of 2,500, in which the capital sum was to be paid were not taxable, but that the royalty of 1,000 payable during the subsistence of the patent was liable to assessment. This decision, in my opinion, is clearly against the contention of the assessee in this case. Here, as already stated, the assignment was not for a capital sum, but was for ₹ 4,500 payable annually so long as the Khem or the Tej Patent may survive. It is, therefore, clearly like the royalty payable in the case cited and is assessable. In this connection, reference may also be made to the decision of the House of Lords in Constantinesco v. Rex (11 Tax Cases 730 at 746) where it was held that if what was assigned was merely the use of the invention for a period of time, and the corpus of the patent was not taken away from the grantor but still remained hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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