high court of bombay

Lipi International

v.

Commissioner of Income-tax, Pune

F.I. Rebello and J.P. Devadhar, JJ.

IT Reference No. 688 of 1987

August 1, 2007

Section 4 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 1978-79 - Whether if there is a complete disposal of asset with know-how resulting in parting of asset for a lump sum, with no reference to anticipate user, consideration received for disposal of such asset would be a capital receipt - Held, yes

Facts

The assessee-firm was engaged in the business of (a) designing, manufacturing and selling high pressure burner and hearing system for boilers and furnaces, (b) manufacturing pressure vessels, heat exchangers, etc., and (c) erecting of plant equipments. By virtue of an agreement, it sold five different models of boilers and fuel firing equipment for certain consideration to a company. Under the said agreement, the assessee further agreed not to engage itself in manufacture either alone or in assistance with someone else, of any of these models which had been sold as also any other type of boilers. The assessee also assured the said company that it had no other model of that capacity and of the system developed which was capable of competing in size and capacity or in technology with the models sold to the company. The Assessing Officer treated the sale consideration as revenue receipt holding that receipt was not self-generated or on goodwill account since the assessee’s fundamental expertise and know-how was put to use in a commercial sense as an integral part of its business. The Commissioner (Appeals) held that the receipt in question was capital receipt. The Tribunal held that the said receipt was revenue receipt.

On reference :

Held

One of the tests to decide whether the receipt partakes the character of a revenue receipt or capital receipt, is whether the receipt from the transfer of know-how is of capital or revenue nature. That would depend on the nature of the transaction out of which the receipts arose and the context in which the receipts are received. If the imparting of know-how is really in the nature of services rendered without anything more, the receipt must be treated as a revenue receipt. However, when the consideration is received for imparting know-how in association with the disposal of capital asset, then the receipt will have to be treated as capital receipt. [Para 5]

There is no single determinative test to decide the nature of the receipt, whether capital or revenue. To answer the issue, one will have to examine the terms of contract, the nature of transaction or the terms of transfer of know-how. One of the tests would be is the agreement for transfer of the assets, a method of trading by which it acquires the source of income. If yes, then normally it would partake the character of a revenue receipt. If, on the other hand, there is a complete disposal of the asset with the know-how resulting in parting of the asset for a lump sum, with no reference to anticipated user, it would be a capital receipt. [Para 10]

From the various clauses in the agreement, it would be clear that there had been parting of an asset along with know-how and the transferee had not retained any right in itself in the said transferred assets and on the contrary had agreed not to carry on further business in the manufacture or design of boilers. [Para 10]

All those clauses would clearly indicate and show that the consideration received was a capital receipt. [Para 11]

Hence, the Tribunal was not right in holding that receipt in question was a revenue receipt.