TMI Blog2006 (7) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Sheet reads as under: "Advance of Japanese Yen 2,80,00,000 paid to Dai-ichi Kogyo Seiyaku Company Ltd., Japan towards technical know-how fees has been valued at TT selling rate of Rs. 100 J.Y. 367.5 as on 31-3-1993 and the difference has been transferred to Capital Reserve Account." In the course of assessment proceedings for the assessment year 1993-94, it was explained by the assessee as under: ". . . that a sum of 28 million Japanese Yen equivalent to Rs. 26,07,751 was paid by the assessee-company to M/s. Dai Ichi Kogyo Seiyaku Company Limited, Japan (hereinafter referred to as "DKS") in the years 1986 and 1988 on account of technical know-how fees and the same was shown in the books of account as capital work-in-progress. . . . the said remittance was revalued at the exchange rate prevailing as on 31-3-1993 and the re-valued amount arrived at Rs. 76,19,048, which resulted into capital appreciation of Rs. 50,11,297. . . . since there was only a notional gain, the amount has been credited as "Capital Reserve" in the books of account. It was, accordingly, submitted that since there was no actual gain, the amount cannot be brought to tax either as revenue income or as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve --------------------------------------------------------- Rs.76,19,048 Rs.76,19,048 The above sum of Rs. 76,19,048 was shown as advances recoverable under the head "Loans Advances" and the difference was credited to Capital Revenue Account. 5. The Assessing Officer in para 12.5 of his order discussed the subsequent events as under: ". . . On 28-6-1993, the assessee debited Bank Account of DKS in pursuance of tripartite agreement and the payment was received towards advances recoverable from DKS. On 22-6-1993, assessee debited the account of DIGCIL and credited the Bank account for a sum of Rs. 76,19,048 towards payment of; advance by the assessee to DIGCIL against Share application money. It may be mentioned here that the assessee-company was to invest in the share capital of the joint venture company DIGCIL as per the agreement. Both the persons, i.e., the assessee-company and DIGCIL have their Bank accounts in the same bank, i.e., Bank of India, Bombay (Main) Branch, M.G. Road, Bombay. On perusal of the copies of Bank statements of the assessee and DIGCIL, it is noticed that although in the accounts, entries have been passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, on capital account, a sum of 28 million Japanese Yen in its bank account. The appellant did not own any foreign currency abroad. The appellant was the owner of engineering documents which it had received as a result of payments made to DKS and it also had a right for specific performance under which DKS was bound to assist in the manufacture of a chemical for which the agreement was entered into. Therefore, it is not correct to say that the appellant had foreign currency abroad which had appreciated. 3. The appellant voluntarily agreed to surrender its rights and to handover engineering documents to the Joint Venture Co. and as a consequence became entitled to 28 million Japanese Yen which it had paid to DKS in the earlier years. Therefore, to my mind, the decision of the Supreme Court in the case of Sutlej Cotton Mills does not apply to the facts of the appellant's case and the excess amount of Rs. 50,11,297 cannot be held as capital receipt not liable to tax. 4. That no benefit accrued to assessee in terms of section 28(iv) of the Act and, therefore, Assessing Officer was not justified in assessing the said sum on business income. 5. The appellant had entered into an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under: "But I would agree with the AR that when as a measure of abundant caution the Assessing Officer had reopened the assessment proceedings for assessment year 1994-95 to give effect to the CIT(A)'s order, he should not have deviated from the conclusion reached by CIT(A) in the course of appellate proceedings. In the reassessment proceedings he should have only followed the directions of the CIT(A). I would accordingly annul the assessment of business profit under section 28(i) made by the Assessing Officer of Rs. 58,62,249 and directed the Assessing Officer to compute the long-term capital gain as directed by the CIT(A) during the assessment year under consideration. The appellant-company has furnished a working of such capital gain to the tune of Rs. 32,41,437 in accordance with the provisions of section 48. The Assessing Officer must verify the same and determine the long-term capital gain income of the appellant-company during the assessment year under consideration in accordance with the directions of the CIT(A). It may be noted here that the avenues for the department to seek the finding of a higher judicial authority namely the ITAT would not be closed even in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1994-95 was bad in law." 10. Both the parties have been heard at length. The first question to be considered is whether, the gain on account of exchange fluctuation accruing to the assessee is revenue receipt chargeable to tax under section 28(iv) of the Act or capital receipt not chargeable to tax or capital receipt chargeable to tax as capital gain under section 45 of the Act. The stand of the revenue has been that, gain on account of fluctuation in exchange rate amounts to benefit arising from the business and, therefore, is assessable under section 28(iv) of the Act. Further, it is the case of revenue that agreement was not for purchase of drawings, designs, etc., but for obtaining of technology for its use in its business of manufacturing of chemicals for a certain period and, therefore, payment by assessee was on revenue account. Reliance has been placed on terms of the agreement as well as on the following judgments: (i) CIT v. Indian Oxygen Ltd. [1996] 218 ITR 337 (SC); (ii) CIT v. Metallurgical Engg. Consultants (India) Ltd. [1996] 221 ITR 90 (Pat.); (iii) CIT v. Kirloskar Bros. Ltd. [1990] 181 ITR 527 (Bom.); (iv) CIT v. BPL Systems Projects Ltd. [1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tems is on capital account. Reliance was also placed on the judgment of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, in support of the proposition that if payment is made on capital account, then gain on account of fluctuation in exchange rate would be on capital account. Reliance was also placed on the judgment of Bombay High Court in the case of CIT v. Shah Construction Co. Ltd. [1999] 237 ITR 814, for the proposition that advance paid would continue to be on capital account till it is appropriated against the running bill. Proceeding further, it is submitted that all expenses, even of revenue nature, are to be considered as part of cost of plant incurred up to the erection of plant. Attention was also invited to the Supreme Court judgment in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. Finally, it was submitted that judgments relied upon by the revenue are distinguishable on facts. 12. Rival submissions of the parties have been considered carefully in the light of the materials placed before us and the case law referred to. The question for our consideration is whether fluctuation in rate of exchange related to capital/rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held as a capital asset or as fixed capital, such profit or loss would be of capital nature." There is no dispute to such settled legal position. However, dispute has arisen because of different stand of the parties. The stand of the revenue is that, agreement between the parties was for obtaining the technology for use in assessee's business for a limited period and not for outsight acquisition and, therefore, payment by assessee was on revenue account. On the other hand, the stand of assessee is that, payment was on capital account since it acquired drawings and designs which constitute capital goods. Let us now examine the relevant terms of the agreement between the parties. 14. We have gone through the agreement between the parties entered into on 5-12-1985, copy of which is placed in the paper book at 101. The assessee is described as DKI while foreign collaborator is described as DKS. The preamble and relevant Articles of the agreement are being reproduced as under: "Preamble WHEREAS DKS represents that it has developed and has the right to license a PROCESS as hereinafter defined, that it is commercial operating the PROCESS at its manufacturing facilities located ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 12 provides that agreement shall be in force till the royalty period which as per Article l(ii) is for 5 years only from the date of commencement of commercial production; (iii) Article 11 provides that assessee shall maintain secrecy with reference to any information given to assessee; (iv) Article 10 provides that in case of expansion, the assessee is required to get the permission of DKS. (v) As per Article 14.2, the agreement is not assignable by the assessee. In our view, the rights of DKS (foreign collaborator) are not diminished in any manner by virtue of the above agreement. DKS continues to be the owner of technology even after transferring of designs, drawings, etc. The view of ours is justified by the judgment of the Apex Court in the case of Indian Oxygen Ltd. In that case, the question was whether payment on account of use of technology was revenue expenditure or capital expenditure. The Hon'ble High Court, after considering the terms of the agreement, held as under: "The English company did not sell any information, processes and inventions to the Indian company. Under clause 22 of the agreement, the Indian company is not entitled to sue them after th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical knowhow but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee and royalty. In our considered opinion, in the facts and circumstances of the case the High Court was fully justified in answering the reference in favour of the revenue and against the assessee. These appeals are, accordingly, dismissed but in the circumstances without any order as to costs." Therefore, it is clear that payment for use of technology may be on both accounts. If it is used in capital field, then it would be not lllowable as deduction. On the contrary, if it is to be used in the course of existing business, then it would be allowable deduction being on revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit" as held by the Hon'ble Supreme Court in the case of Mafatlal Gangabhai Co. (P.) Ltd. There is no dispute that entire amount has been received in cash by the assessee which is also apparent from Page 14 of the assessment order where it has been stated that Bank Account was credited on 15-9-1993. Thus, section 28(iv) would not apply. Hence, the learned CIT(A) was justified in holding that such income could not be assessed under section 28 of the Act. 18. Now the question arises whether such capital receipt can be assessed under the head "Capital gain" as held by the learned CIT(A) in Para 12.10 of his order. The reason given by him is that, assessee acquired valuable right to the technical know-how and assistance from DIK by making part payment to DKS which was surrendered under the agreement dated 3-4-1992. According to him, such surrender amounted to transfer of such valuable right within the scope of section 2(47) of the Act. We are unable to accept such reasoning. The perusal of tripartite agreement clearly shows that original agreement could not be acted upon for certain reasons and the same was cancelled ab initio and had to be treated as null and void. This is apparen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al assistance. It is the second part which requires approval by the Government. If the original agreement itself requires to be cancelled, no approval is required. No provisions have been brought to our knowledge which require such approval. Agreement for know-how requires approval because it involves remittance of foreign exchange. Since cancellation of original agreement did not require any approval, first part of the agreement became effective on 3-4-1992 itself, irrespective of its approval. Thus, had there been any income chargeable to tax, it would have been assessable in assessment year 1993-94. At one stage of hearing, the learned counsel for the assessee tried to argue that original agreement was decided to be cancelled in 1988 itself and, therefore, original agreement got cancelled in that year. We reject the plea - firstly, no such ground was raised in the cross-objection, secondly, no additional ground has been raised in this regard and thirdly, mere understanding between the parties is not enough to terminate the contract. A contract can be terminated by another contract or by virtue of terms contained in the agreement itself. Since, original agreement was terminated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that in order to allow the claim of bad debt, it is sufficient if the bad debt in question is written off in the assessee's books of account. 23. Both the parties are agreed that ground No.1 is covered against the assessee by the Supreme Court judgment in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546. Following the same, the order of the learned CIT(A) is set aside on this issue and consequently the order of the Assessing Officer on this issue is restored. 24. Both the parties are further agreed that ground Nos. 2, 3 and 5 are covered in favour of the assessee by the decisions of the Tribunal in assessee's own case pertaining to various assessment years, i.e., 1990-91 to 1992-93, 1995-96 and 1996-97, dated 7-1-2005, copy of which is placed on record. Following the same, these grounds are dismissed. 25. Ground No.4 relates to disallowance of royalty of Rs. 29,79,784. The disallowance was initially made under section 40(a)(i) of the Act relating to assessment year 1992-93 on the ground that the TDS amount had not been deposited within the prescribed period. On appeal, it was contended by the assessee before the learned CIT(A) that the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X
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