2009 Supreme(MP) 1252

MADHYA PRADESH HIGH COURT AT INDORE BENCH
A.M.Sapre, S.K.Seth, JJ.
S.Kumars Tyre Manufacturing Company Ltd. - Appellant
Versus
Commissioner of Income Tax - Respondent
Decided On : 06-07-2009

The compensation received by the assessee on termination of the agreement with Michelin was a revenue receipt and not a capital receipt. The agreement did not create any capital asset or advantage of enduring nature in favor of the assessee. The payment was made to adjust the relations between the parties and not as consideration for the sale of any capital asset.

Headnote:

INCOME TAX - REFERENCE - ADDITION - INTEREST CHARGED U/S 234B - TRIBUNAL'S JURISDICTION TO ALLOW ADDITIONAL GROUND - ASSESSEE'S RIGHT TO RAISE ADDITIONAL GROUND - REVENUE RECEIPT - CAPITAL ASSET - COMPENSATION RECEIVED ON TERMINATION OF AGREEMENT - WHETHER REVENUE OR CAPITAL RECEIPT - ACCRUAL OF INCOME - MERCANTILE SYSTEM OF ACCOUNTING - TAXABILITY.

Fact of the Case:

The assessee, a manufacturer of tyres and tubes, entered into a foreign collaboration agreement with Michelin France for the manufacture of tyres and tubes for scooters and motorcycles. The agreement provided for payment of royalty, lump sum know-how fee, and duration of the agreement. The assessee set up a factory and paid the know-how fees in installments. Disputes arose between the assessee and Michelin, which were settled by an agreement in 1991. The assessee received a sum of Rs. 2,88,51,613 as the first installment and Rs. 2,29,50,782 as the second installment. The assessee claimed the amount as capital gains, but the AO treated it as revenue receipt and added it to the income of the assessee.

Finding of the Court:

1. The Tribunal has the jurisdiction to allow an additional ground to be raised by the assessee in appeal, provided that the assessee satisfies the Tribunal that the ground was bona fide and could not have been raised earlier for good reasons. 2. The compensation received by the assessee on termination of the agreement with Michelin was a revenue receipt and not a capital receipt. The agreement did not create any capital asset or advantage of enduring nature in favor of the assessee. The payment was made to adjust the relations between the parties and not as consideration for the sale of any capital asset. 3. The amount of Rs. 2,29,50,782, which was received by the assessee on 30th November, 1992, accrued to the assessee in the assessment year 1992-93 and was rightly brought to tax in the said assessment year. The assessee follows mercantile system of accounting and the right to receive the amount accrued to the assessee on the date of execution of the agreement, which was 22nd November, 1991.

Issues: 1. Whether the Tribunal was justified in declining to admit the additional ground regarding charging of interest under Section 234B of the IT Act? 2. Whether the Tribunal was justified in concluding that compensation of Rs. 5,18,62,396 received by assessee constituted revenue receipt and is liable to be assessed as revenue receipt? 3. Whether the Tribunal was correct in holding that amount of Rs. 2,19,50,782 accrued to assessee in the asst. yr. 1992-93 and was rightly brought to tax in the said assessment year?

Ratio Decidendi: 1. The power of the AAC is coterminous with that of the ITO, and there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the ITO. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. 2. The true nature of the agreement between the assessee and Michelin was that of a consultancy and a license to use the trade name. The payment made by the assessee was not for the acquisition of any capital asset. The technical know-how made available by Michelin cannot be treated as a capital asset. The fact that the production can still be continued after the expiry of the agreement is immaterial for deciding whether such know-how can be treated as a capital asset. 3. Under the mercantile system of accounting, the taxable event accrues on the date when the right to receive any sum accrues to the assessee or when the liability to pay any sum accrues to the assessee. In this case, the right to receive the total sum of Rs. 5,18,62,396 accrued to the assessee on 22nd November, 1991, which also included the right to receive the second installment of Rs. 2,19,50,782. Therefore, it was rightly taxed in the hands of the assessee in the assessment year 1992-93.

Final Decision: 1. The question No. 1 is answered in favor of the assessee and against the Revenue. 2. The question No. 2 is answered against the assessee and in favor of Revenue. 3. The question No. 3 is answered against the assessee and in favor of Revenue. 4. The question No. 4 is not answered.