1. The Departmental appeals and Cross Objection by assessee have been heard together and, therefore, are being disposed of by the common order for the sake of convenience.
2. The major issue arising in these appeals and Cross Objection is, whether the amount of Rs. 50,11,297/.- received by the assessee is assessable to tax either as capital gain or income Under Section 28(iv) of the Income Tax Act, 1961 (Act) either in Assessment Year 1993-94 or 1994-95.
3. Briefly stated, the facts are these: The assessee is a company engaged in business of manufacture and sale of chemicals. In the Balance Sheet for the year ending 31.3.1993, a sum of Rs. 50,11,297/-was shown on the liability side under the head "Capital Reserve", as accretions during the year. Note-7 to Schedule-17 to the Balance Sheet read 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 year 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 revalued 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 accounts. It was, accordingly, submitted that since there was no actual gain, the amount cannot be brought to tax either as revenue income or as on capital account. The assessee has also placed reliance on the decisions in the case of Sutlej Cotton Mills Ltd. v. CIT 116 ITR 1 SC and CIT v. Hind Construction Ltd. 83 ITR 211 SC.4. The Assessing Officer noted that in the course of its business, the assessee entered into a technical collaboration agreement on 5.12.1985 with DKS for supply of technical know-how to be used for manufacture of a chemical, known as Flocculants of (SIC) and Cationic type, at the.
assessee's factory located in Pune. In pursuance of this agreement assesses paid to DKS a total sum of Japanese Yen 2,80,00,000 in the year 1986 and 1988, towards 2 installments of 14 million Japanese Yen each, on account of technical know how fees as under: The above amount of Rs 26,07,551/-, being rupee equivalent of 28 million Japanese Yen, was debited by the assessee as capital work-in-progress in the books of account. Subsequently, it was decided that the manufacture of the above chemical would be carried out in a Joint Venture Company named M/s. Dai Ichi Gosei Chemicals (India) Ltd. (hereinafter referred to as "DIGCIL") and for this purpose a tripartite agreement was entered into among the assessee, DKS and DIGCIL or 3.4.1992. Vide this agreement, the original agreement dated 5.12.1985 was declared null and void. It was, interalia, provided in the tripartite agreement that the amount paid by the assessee to DKS under the original agreement will be deemed to have been paid on account of "DIGCIL". It was further provided that DIGCIL, in turn, shall reimburse Japanese Yen 2,80,00,000/- to the assessee company. Thus, during the year the amount became recoverable by the assessee from DKS and the same was to be disbursed by "DIGCIL". No actual payment could be received by the assessee from DIGCIL till the end of the year. In the books of accounts, the assessee passed following entries at the end of the year.
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, the 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 passed in June, 1993, the cheques were actually cleared at a later date on 15.9.1993. On this date, there was simultaneous credits and debits in the Bank accounts of both the companies i.e., assessee company and the DIGCIL for the above amount of Rs. 76,19,048/-. These facts show that the assessee received from DIGCIL the amount of Rs. 76,19,048/- on account of advance receivable from DKS and the same amount was paid to DIGCIL towards assessee's contribution on account of share capital. In the result, the sum of Rs. 76,19,048/, which consists of original advance of Rs. 26,07,751/- paid in 1986/88 and actual gain during the year of Rs. 50,11,297/, has been actually utilised towards subscription for share capital in DIGCIL.
6. In view of the above facts, the Assessing Officer was of the view that the sum of Rs. 50,11,297/ was not notional gain but represented actual gain accruing and arising during the year ending 31.3.1993. it was further observed that gain did not arise on account of revaluation but on account of cancellation of agreement entered into originally on 5.12.1985. The assessee had given a colour of revaluation to suppress the true nature of transaction. Accordingly, theory of notional gain was rejected. The Assessing Officer further held that such gain amounted to benefit in the course of carrying on business and, therefore, the same was chargeable to tax Under Section 28(iv) of the Act in the Assessment Year 1993-94 in as much as assessee was maintaining its books on mercantile basis. He further was of the view that the above sum was nothing but compensation for the earlier period and may be treated as interest chargeable to tax. He also opined that entries in the books of account were not relevant in determining the nature of income. Accordingly, he included the above sum in the total income of assessee by assessing under the head "Profits & Gains of Business".
7. On appeal, the Learned CIT (A) examined the material on record and held as under: 1. The original agreement dt. 5.12.1985 also does not stipulate payment of interest or any compensation to the appellant in case of DKS decides not to transfer the technical know-how. It is, therefore, incorrect and also illogical to allege that the excess amount of Rs. 50,11,237/- represent interest on earlier payments of Rs. 26,07,751/- made by the appellant to DKS. 2. It cannot be said that the appellant was holding, 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 hand over 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 agreement with DKS for the supply of technical know how for the manufacture of the specific chemical, and also paid 28 million Japanese Yen to DKS under the terms and conditions of the said agreement. A sum of 14 million Japanese Yen was paid after the approval of agreement by the Indian Government and a further sum of 14 million Japanese Yen was paid after receiving the engineering documents from DKS. The appellant itself treated these payments as "capital work-in-progress" and indeed, they were in the nature of capital expenditure on acquiring the desired technical knowhow. As a result of these payments, the appellant became entitled to technical know how and assistance from DKS and also came to process the engineering documents relating to the manufacturing process. The engineering documents as well as the right for assistance in setting up of the unit with the technical know how supplied by the DKS was a valuable right which was surrendered by the appellant under the agreement dt. 3.4.1992 on mutually agreed basis. Such surrender of right amounts to "transfer" within the meaning of Section 2(47) of the Act and, in my opinion, the excess amount accruing to the appellant as a result of such surrender of rights is liable to tax as "capital gains". I, therefore, hold that the sum of Rs. 50,11,297/- is chargeable in the appellant's hands as "capital gains" and since the right to technical know how was with the appellant for more than 36 months, the same should be charged as "long term capital gains".
6. Since the tripartite agreement dated 3.4.1992 was taken on record by Indian Govt. on 10.5.1993 and engineering documents were thereafter handed over by assessee, the transfer became effective on 10.5.1993 and, therefore, capital gain was chargeable to tax in Assessment Year 1994-95.
In view of the above findings, the Learned CIT (A) deleted the addition vide order dated 29.4.1997.
8. The assessment for Assessment Year 1994-95 was originally made Under Section 143(1)(a) but subsequently reopened Under Section 148 by issue of notice Under Section 148 on 25.7.1997. The Assessing Officer again examined the above issue and held that the amount received by assessee was taxable Under Section 28(iv) of the Act. However, this time he worked out the income at Rs. 58,62,649/- considering the rate of exchange as on 31.3.1994. On appeal, the Learned CIT (A) observed as under: But I would agree with the AR that when as a measure of abundant caution the A.O had reopened the assessment proceedings for A.Y. 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 curse 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 AO 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 AO 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 present situation and the department would be entitled to go in appeal for A.Y. 1994-95 to plead that the amount of foreign exchange gain earned by the appellant company should be assessed as revenue profit either in A. Y. 1993-94 or in A. Y. 1994 9. Aggrieved by the above orders of the Learned CIT (A), the Revenue has filed appeals before the Tribunal by raising following ground: On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the amount of Rs. 50,11,297/- brought to tax Under Section 28(iv) of the I.T. Act and holding that the said amount is taxable as long term capital gain in the A.Y. 94-95.
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in annualling the assessment wherein addition of Rs. 58,62,249/- was made on account of difference between the foreign exchange rates earned on Rs. 28 million Yen towards non-fulfillment of agreement holding that the assessment was reopened on the basis of the findings of the Id. CIT (A) in A.Y. 1993-94 that the amount in question was assessable in A. Y. 1994-95.
On the other hand, the assessee has filed Cross Objection for the Assessment Year 1993-94 raising following objections: 1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeal) has erred in holding that the sum of Rs. 50,11,297/- be taxed as Long-term Capital Gains in the assessment year 1994-95.
B. The learned CIT(A) has failed to appreciate that it was beyond his jurisdiction to give directions for a previous year which was not before him and therefore the directions so made be deleted.
C. Without prejudice to the aforementioned, the learned CIT(A) failed to appreciate that during the relevant previous year, there was no transfer and therefore the question of levying capital gains could not be determined either for the relevant previous year and/or for any subsequent year.
D. Without prejudice to the same, the learned CIT(A) failed to appreciate that even if capital gains have to be computed after taking the enhanced cost and the indexation, the assessee would have suffered a loss and therefore the observations or directions given for computing capital in Assessment 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:CIT v. Kirloskar Bros. Ltd. The Revenue has also relied on the judgment of the Hon'ble Bombay High Court in the case of Protos Engineer Co. Ltd., 211 ITR 919, for the proportion that benefit accruing on remittances from its customers is taxable Under Section 28(iv) of the Act.
11. On the other hand, the stand of the assessee has been that, payment was on capital account and the same was debited as capital work in progress. Further, the agreement was in fact for purchase of drawings, designs, etc. and, therefore, amount paid was on capital account.
Further, it has been submitted that cash receipts would be outside the purview of Section 28(iv) of the Act in view of the Bombay High Court judgment in the case of Mahindra & Mahindra Ltd., 261 ITR 501 (Bom.), Gujarat High Court judgment in the case of Saurashtra Packaging Ltd., 259 ITR 520 and judgment of the Apex Court in the case of Mafatlal Gangabhai, 219 ITR 644 (SC). Further, judgment of the Bombay High Court in the case of Protos Engg. Co. Ltd. (supra) relied by the Revenue is distinguishable on facts since payment related 10 commission being on revenue account. Our attention was also drawn to the terms of the agreement to contend that assessee had acquired the ownership rights in drawings, designs, documentation, etc. and thus, payment was on capital account. It is pointed out that there is no clause for return of such documents and, therefore, it is wrong to contend that the same were given to assessee only for use thereof. It is also submitted that on account of cancellation of the earlier agreement, the advance paid ceased to be advance for acquiring technical knowhow and became a loan simpliciter and, therefore, gain on account of fluctuation in exchange rate must be held to be on capital account. Reliance was also placed on the judgment of the Apex Court in the case of Scientific Engg. House, 157 ITR 86 (SC) for the proposition that acquisition of drawings, designs, etc., amount to acquisition of "Plant" Under Section 43 of the Act and, therefore, assessee is entitled 10 depreciation. This itself shows that payment for acquiring such items is on capital account.
Reliance was also placed on the judgment of the Supreme Court in the case of Sutlej Cotton Mills, 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 Shah Construction Co. Ltd., 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 Chellapalli Sugar Ltd., 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 / revenue account. In our opinion, no universal test can be applied and the answer to the question would depend on the facts of each case. We shall first refer to some of the judgments referred to. The first judgment of the Apex Court available on this issue is CIT v. Tata Locomotive & Engg. Co. Ltd. 60 ITR 405. In that case, assessee sent 33,850 dollars to its agent in USA, after obtaining permission of Exchange Central Authorities for purchase of capital goods. The assessee had also earned commission of 36,123 dollars on the sale of goods of American Company - Baldwin Locomotive Works. This amount was also retained with its US Agent for purchase of goods. Later on, the assessee found it more expensive to buy American goods and, therefore, repatriated 49,500 dollars to India after getting permission of Reserve Bank of India. This resulted in surplus on account of fluctuation in exchange rate. The question arose whether such surplus was capital receipt or revenue receipt. The Apex Court held - Held, that the act of retaining the monies in the U.S.A. for capital purposes after obtaining the sanction of the Reserve Bank was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. The surplus attributable to $ 36,123 was capital accretion and not profit taxable in the hands of the assessee.
A perusal of the above reveals that this judgment is an authority for the proposition that if the foreign currency is held for purchase of capital goods, then surplus on account of fluctuation in exchange rate would be capital receipt.
13. The next judgment of the Apex Court is Sutlej Cotton Mils Ltd. v.CIT 116 ITR 1. Their Lordships, after referring to various judgments including the one referred to in the preceding para, held as under: The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading aspect or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is 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.
We nave 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: WHEREAS DKS represents that it has developed and has the right to license a PROCESS as hereinafter defined, that it is commercially operating the PROCESS at its manufacturing facilities located in Chgata Town, Nilgata Pref., Japan, and is commercially selling PAAm produced therein, and WHEREAS DKS is willing and entitled to disclose to DIK the DKS PROPRIETARY INFORMATION on the PROCESS, to provice DIK with process engineering documents together with complete technical assistance in the use thereof (as hereinafter defined), and to grant a license on terms and conditions as set forth herein, and WHEREAS DIK desires to obtain abovesaid information, engineering document, technical assistance and license on said terms and conditions.
NOW THEREFORE, in consideration of the provisions hereof, the parties mutually covenant and agree as follows: Article-1(11) - ROYALTY PERIOD shall mean the period of five years from the date of commencement of commercial production, provided, however, that the ROYALTY PERIOD shall terminate at the eighth anniversary of being taken on record of this AGREEMENT if commencement of commercial production is delayed beyond three years from the date on which this AGREEMENT is taken on record.
2.1 DKS agrees to grant and hereby grants to DIK subject to Indian government regulation: (1) A non-exclusive right and license to use DKS PROPRIETARY INFORMATION disclosed by DKS to DIK pursuant to ARTICLE 3, ARTICLE 4 and ARTICLE 6 hereof for the construction and operation of DIK's PLANT in the TERRITORY. (2) A non-exclusive license to sell PAAm, produced by the DIK's PLANT in the SALES TERRITORY. 2.2 DIK should be free to sub-license, the DKS PROPRIETARY INFORMATION to another Indian party, should it become necessary. The terms of such sub-licensing will, however, be as mutually agreed to by all the parties concerned including DKS and will be subject to the approval of Indian Government.
2.3 DIK shall not use any trademark and/or trade name of DKS concerning PAAm.
A combined reading of the above provisions of the agreement snows that it was not a case of outright purchase of technology. The gist of the agreement shows that it was a case of transfer of technology for use by assessee in setting up of the unit as well as in the process of manufacture. This inference is because of the following facts in the agreement: (i) The preamble itself states that DKS only granted license to use the technology; (ii) Article 12 provides that agreement shall be in force till the royalty period which as per Article 1(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; (vi) 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., 218 ITR 33/ (SC).
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 use them after the termination of this agreement. The Indian company is prohibited from disclosing these information, processes and inventions during the currency and also after the determination of this agreement in view of its Clause 11. Though this agreement is for a period of ten years, it can be terminated earlier as provided in Clause 23. Therefore, it cannot be said that the Indian company has incurred the expenditure for the purposes of bringing into existence any asset or advantage of an enduring nature. It must also be held that this expenditure is not a capital but a revenue expenditure, for it was incurred by the Indian company for running its business or working it with a view to produce profits.
On appeal, the Apex Court upheld the above finding of the High Court.
The facts of the present case are almost similar. Accordingly, it is held that payment was not for acquiring any capital asset but for use of technology for a specified period.
15. However, the above finding, in our opinion, still does not resolve the controversy before us since payment for use of technology is not always on revenue account. This aspect of the matter can be explained with reference to two judgments of the Apex Court. The first judgment is reported as Alembic Chemical Works v. CIT 177 ITR 377 (SC). In that case, the company was engaged in the business of manufacturing of antibiotics and pharmaceuticals. The company, with a view to increase the yield, entered into and agreement with Japanese company for supply of knowhow for its use in the manufacturing process against lump sum payment. The question arose whether the payment was on revenue account or capital account. Their Lordships held that since use of knowhow was in the course of existing business of manufacturing of medicines, the payment was on revenue account. The other judgment is reported as Jonas Woodhead and Sons Pvt. Ltd. v. CIT 224 ITR 342 (SC). In that case also, the technical knowhow was obtained for use by assessee but it was to be used in setting up of the plant. Their Lordships of the Apex Court, after considering various judgments including in the case of Alembic Chemical Works (supra), held that payment was on capital account. The relevant portion of the judgment is extracted below: But in the case in hand the High Court having considered the different clauses of the agreement and having come 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 know-how 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 allowable 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 account. On the similar analogy, we are of the view that if the payment is made for use of technology for setting up of the unit but the agreement is not materialized due to some reasons, then refund of such amount would be on capital account and consequently, gain on account of fluctuation in exchange rate would also be on capital account. On the other hand, if payment was intended for use of "technology for manufacturing activity relating to existing business, it would be on revenue account.
16. In the present case, we find that payment was required to be made on three accounts - (i) 28 million Japanese Yens for supply of drawings, designs and documentation, (ii) 15 million Yens for rendering services by DKS to assessee and (iii) 5% of net sales for a period of 5 years from the date of production. Article-3 provides for transfer of such drawings and designs. The perusal of Article-4 of the agreement reveals that such designs, drawings, etc., were meant for setting up of the plant and DKS was to render all services / assistance in setting up of such plant. Article-5 of the agreement is guarantee clause wherein DKS is to ensure that plant has been designed, erected and commissioned as per the specification. (All the Articles mentioned above have already been reproduced in earlier part of the order). The combined reading of the above Articles shows that payments for drawings, designs, etc. as well as for services rendered related to setting up of the plant. Only the royalty based on net sales could be said to be related to technology for manufacturing process. Hence, we are of the view that payment of 28 million yens was intended for setting up of the plant and, therefore, was on capital account. Thus, income arising on account of fluctuation in exchange rate, in our humble opinion, was capital receipt in view of the Supreme Court; judgment in the case of Jonas Wood head Pvt. Ltd. (supra).
17. Having held that payment was on capital account and the gain on account of fluctuation in exchange rate was capital receipt, the question of assessing the same as benefit arising from business Under Section 28(iv) of the Act does not arise. Unless the benefit, if any, is on revenue account, the same cannot be assessed as business income Under Section 28. Apart from the above discussion, the payment received in cash would not fall within the ambit of the word "benefit" as held by the Hon'ble Supreme Court in the case of Mafatlal Gagalbhai Pvt.
Ltd., 219 ITR 644. 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 knowhow and assistance from DKS 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 apparent from the preamble of the tripartite agreement which has been approved by the Govt. of India in may 1993, reads as under.
WHERE AS KDS and DIK entered into the Licensing Agreement regarding Polyacrylamide dated December 5, 1985 (hereinafter referred to as "the Original Licensing Agreement"), and DKS disclosed technical information regarding Polyacrylamide to DIK and DIK paid to DKS certain amount of lump sum, thereunder: and WHEREAS, DKS, in the meantime, has been proceeding the development of the new manufacturing technology of Polyacrylamide and has completed it recently; and WHEREAS, taking the advantage and profitability of the new technology into consideration, DKS and DIK agreed to pursue the Polyacrylamide business in India by utilizing the new technology in a joint venture company to be formed by them and they have formed licensee thereunder; and WHEREAS, DKS agreed to license the new technology to Licensee and they entered into a new licensing agreement dated 1992 (hereinafter referred to as 'the New Licensing Agreement'); and WHEREAS, DKS and DIK agree and confirm that the Original Licensing Agreement between DKS and DKI now stands null and void; and WHEREAS, DKS, DIK and Licensee desire to determine the treatment of the technical information disclosed to DIK by DKS under the Original Licensing Agreement and above-said lump sum paid to DKS by DIK thereunder.
19. In view of the above, all rights and obligations under the original agreement got vanished and in turn assessee was required to return the design and drawings and DKS was required to refund 28 million Japanese Yen. It was only a case of refund of same amount in Japanese currency which on conversion resulted in gain to assessee. Thus, in our opinion, there was no transfer of any capital asset and consequently refund of the original amount was simply a capital receipt not chargeable to tax.
20. In view of the above finding, the question regarding the year of taxability does not survive. 'The answer to such question is merely academic one. However, to avoid the future litigation, we proceed to answer the same. The original agreement was cancelled on 3.4.1992 by the new agreement which is in two parts. The first part cancels the original agreement between DKS and assessee. The second part is between DKS and the new formed company - DIGCIL for supply of knowhow and technical assistance. It is the second part which requires approval by the Govt. 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 knowhow 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 and declared as null and void by tripartite agreement on 3.4.1992, the year of taxability would have arisen only in Assessment Year 1993-94.
21. In view of the above discussion, it is held that amount declared by assessee on account of exchange rate fluctuation was capital receipt not chargeable to tax. Consequently, the order of the Learned CIT (A) for me Assessment Year 1993-94 is set aside to the extent it holds that assessee is liable to tax under the head "Capital Gain" as well as the direction that, it is taxable in Assessment Year 1994-95. The order of the Learned CIT (A) for Assessment Year 1994-95 is quashed.
22. Now we proceed to dispose of the other grounds raised by the Revenue in the Departmental appeal pertaining to Assessment Year 1993-94, which reads as under: 1. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in directing the Assessing Officer to allow deduction for guest house expenditure amounting to Rs. 48,000/- being the expenditure on rent and maintenance.
2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to ally business promotion expenses of Rs. 3,55,468/- in full without restricting them to the limit prescribed Under Section 37(2A).
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 7,83,013/- made to the closing stock on account of un-utilised modvat credit.
4. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the Assessing Officer should allow assessee's claim of royalty of Rs. 29,79,784/-.
5. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of loans advanced by the assessee to its sister concerns out of interest bearing borrowings.
6. On the facts and circumstances of the case and in law, the Learned CIT (A) has erred in allowing assessee's claim for deduction of bad debt of Rs. 3,34,915/-ignoring the fact that a substantial part of the loan amounting to Rs. 3,28,373/ was recovered in the Assessment Year 1994-95 proving the fact that bad debt claimed during the year had not actually become bad in the said year.
7. On the facts and circumstances of the case and in law, the Learned CIT (A) has erred in 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 accounts.
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, 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 grounds No. 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 Year 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 Officer should allow this claim in assessment year 1993-94 since the tax was paid in the month of December 1992 and, therefore, necessary directions be issued. The Learned CIT (A), considering the provisions of Section 40(a)(i) of the Act, held that the disallowance was justified in the Assessment Year 1992-93 but it is allowable in Assessment Year 1993-94 on the basis of payment made by the assessee. Accordingly, the Learned CIT (A), while disposing the appeal for the Assessment Year 1992-93, directed the Assessing Officer to allow the same in the Assessment Year 1993-94. Therefore, following the earlier decision, it was held by the Learned CIT (A) that such deduction is allowable in the year under consideration. Consequently, he deleted the disallowance made by the Assessing Officer in this year.
Aggrieved by the same, the Revenue is in appeal before the Tribunal.
26. After hearing both the parties, we do not find any merit in the ground raised by the Revenue. There is no dispute that the expenditure on account of royalty was incurred in Assessment Year 1992-93 but the same was disallowed Under Section 40(a)(i) on the ground that TDS had not been deposited either in the previous year relevant to the Assessment Year 1992-93 nor within the prescribed period Under Section 200 of the Act. it is also admitted fact that TDS was deposited in December 1992 relevant to Assessment Year 1993-94. The proviso to Clause (i) of Section 40(a) clearly provides that such deduction shall be allowable in the subsequent year in which it is paid. Therefore, in our opinion, the Learned CIT (A) was fully justified in allowing the deduction in Assessment Year 1993-94. Accordingly, the order of the Learned CIT (A) is upheld on this issue.
27. Grounds No. 6 and 7 relate to disallowance of bad debt written off by the assessee in the books of accounts. This issue is now covered by the decision of the Special Bench of the Tribunal, Mumbai "H" Bench, in the case of Oman International Bank SAOG (ITA No. 7431/Mum/1997 -order dated 17.5.2006), wherein it has been held that deduction Under Section 36(1)((vii) of the Act, it is enough if the assessee has written off the debt in the books of accounts and it is not obligatory for the assessee to prove that the debt has become bad. There is no dispute that the debt has been written off in the year under consideration.
Therefore, following the same, the order of the Learned CIT (A) is upheld on this issue.
28. In the result, Revenue's appeal for Assessment Year 1993-94 is partly allowed. Revenue's appeal for the Assessment Year 1994-95 stands dismissed, while the cross objection filed by the assessee for Assessment Year 1993-94 stands allowed.