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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI PARTHA SARATHI CHAUDHURY, JM
आदेश / ORDER
PER PARTHA SARATHI CHAUDHURY, JM :
This appeal preferred by the Revenue emanates from the order of the Ld. CIT(Appeals)-I, Nashik dated 20.01.2011 for the assessment year 2007-08 as per the following grounds of appeal on record:
“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik was justified in deleting the addition of Rs.10,65,74,000/- made by the AO on account of Long Term Capital Gains?
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Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik is justified in holding that the amount received from the L & T Limited is a capital receipts and provisions of section 55(2) of the Income Tax Act, 1961 are not applicable? 3. The appellant prays the order of the Assessing Officer may be restored. 4. The appellant prays to adduce such further evidence to substantiate his case. 5. The appellant prays leave to add, alter, clarify, amend and or withdraw any grounds of appeal as and when the occasion demands.”
The grievance of the Revenue in this present appeal is with regard to the deletion of addition of Rs.10,65,74,000/- on account of Long Term Capital Gain by the Ld. CIT(A) which addition was made by the Assessing Officer as per the assessment order.
The brief facts in this case are that the assessee is an individual having income from profession and income from agriculture. During the course of examination of the return the Assessing Officer noticed that the assessee has entered into an Agreement dated 12.09.2006 with the L & T Ltd. for transfer of Knowhow and Technology for total consideration of Rs.11,48,00,000/-. The assessee claimed it as a capital receipt. The Assessing Officer, however, not satisfied with the explanation of the assessee, he therefore, issued a show cause notice dated 30.12.2009 directing the assessee to show cause why the aforesaid amount received by him from Larsen and Tourbo Ltd. for transfer of Knowhow Technology should not be taxed as capital gains u/s.55(2) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟). The assessee responded vide letter dated 30.12.2009 by stating that he entered into an agreement with L & T Ltd. on 12.09.2006 for transfer of technology pertaining to an electrical product called Permanent Magnet Relay (PMR). From verification of the Agreement dated 12.09.2006, the Assessing Officer observed that the assessee had received Rs.11.48 Crores against transfer of
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Knowhow and Technology of PMRs and Rs.2 lakhs per month as a deferred consideration in addition to the lump sum consideration indicated above.
3.1 The assessee had contended before the Department that the said consideration was received as capital receipt and not taxable. The assessee relied before the Assessing Officer the judicial pronouncement of the Hon‟ble Supreme Court of India in the case of CIT Vs. B.C. Srinivas Shetty reported in AIR 1981 SC. It was noticed by the Revenue Authority that Section 55 of the Act was amended by the Finance Act, 1987 with effect from 1.04.1988. The said amendment has nullified the decision of the Hon‟ble Supreme Court in the case of CIT Vs. B.C. Srinivas Shetty (supra.). The cost of acquisition for goodwill has been clearly defined as Nil, if it is not purchased from other previous owner. Circular No.495 dated 22.09.1987, explains the scope and effect of these amendments.
3.2 Section 55(2)(a) has been amended from time to time. If the asset (defined in this section) has not been purchased from any previous owner then the cost of acquisition has to be treated as Nil. Definition of such asset has been amended to include the following:
i. Goodwill (from the assessment year 1988-89)
ii. Tenancy rights, route permit and loom hours (from the assessment year 1995-96) iii. Right to manufacture, produce or process any article or thing (from the assessment year 1998-99) iv. Right to carry on business (from the assessment year 2003-04)
The Assessing Officer, thereafter, examined the Agreement dated 12.09.2006 entered into between the assessee and L & T Ltd. As per Clause 6(b), the assessee shall hand over to the personnel designated by L & T Ltd. the said Knowhow and technology, tangible and intangible, known and
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available with the assessee to design, manufacture, improve and exploit commercially PMRs for application in Earth Leakage circuit breakers and other industrial systems. The Assessing Officer observed that the concern Agreement makes it crystal clear that the assessee sold its right to manufacture, produce or process any article or thing. In view of these facts, the Assessing Officer was of the opinion that provisions of capital gains are applicable in the assessee‟s case. Accordingly, Rs.10,65,74,000/- received by the assessee from L & T Ltd. against transfer of Knowhow and Technology of PMRs was treated as capital receipts of the assessee and Long Term Capital Gain was calculated at Rs.10,65,74,000/-, as cost of acquisition of the asset is Nil.
Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). The assessee filed detailed written submission before the Ld. CIT(A) who after considering the submissions of the assessee along with assessment order, as per reasons recorded in his order, has given relief to the assessee on the issue and deleted the addition on Long Term Capital Gain.
At the time of hearing before us, the Ld. DR vehemently argued that the premise on which the Ld. CIT(A) has given relief to the assessee does not arise from the order of Assessing Officer. The Ld. CIT(A) has gone into analyzing that the technical Knowhow transferred by the assessee for manufacturing of PMR does not fall within the meaning of goodwill. In this background, the Ld. CIT(A) held that in Section 55(2) of the Act, there is no mention of the word „knowhow‟ and therefore, Section 55(2) of the Act cannot be invoked in this case. Consequently, the „knowhow‟ transferred by the assessee is a capital receipt and not chargeable to tax. The Ld. DR filed detailed written submissions before us. That therein, it was contended that Section 55(2)(a),
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the cost of acquisition of following categories of assets is taken as Nil in which it includes right of manufacture, produce or process any article or thing. Thereafter, referring to the Clause 6(b) of the Agreement dated 12.09.2006, the Ld. DR submitted that the assessee in effect has handed over to the personnel designated by L & T Ltd. the said Knowhow and technology, tangible and intangible, known and available with the assessee to design, manufacture, improve and exploit commercially PMRs. Meaning thereby, not only has the assessee transferred his technical know-how, he has also transferred his right to carry on his business based on the said technology. In such scenario, the Assessing Officer was correct in charging Long Term Capital Gain to tax on the assessee.
Per contra, the Ld. AR of the assessee filed an affidavit and placed on record certain facts as contained therein. The sum and substance of the contents of the said affidavit wherein at Para 4, it is stated as follows:
“4. I say that I did not obtain any license or registration for manufacture of Relay in my individual capacity at any point of time in my lifetime and accordingly there is no question of my having any ‘transferable right to manufacture’. I respectfully say that my ‘knowhow’ is a distinct and separate concept from any ‘right to manufacture’. I respectfully submit that what was transferred under the ‘Transfer of Technology Agreement’ dated 12.09.2006 was transfer of ‘knowhow to manufacture’ and not the ‘right to manufacture’”
We have perused the case records and heard the rival contentions. We have also analyzed the facts and circumstances in this case. The contention of the Revenue is that by the Agreement dated 12.09.2006, the assessee not only transferred the „technical know-how‟ but also „right to manufacture‟ and in view of that consideration was received, therefore, the Assessing Officer was justified in imposing the Long Term Capital Gain to tax. Whereas, the assessee through sworn affidavit filed before us has contended that what was transferred, was „knowhow to manufacture‟ and not the „right to
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manufacture‟. These issues needs detailed factual verification and in view of the matter, we set aside the order of the Ld. CIT(Appeals) and restore the matter to the file of the Assessing Officer for detailed verification and adjudicate the same after providing reasonable opportunity of hearing to the assessee.
In the result, appeal of the Revenue is allowed for statistical purposes.
Order pronounced on 17th day of September, 2019.
Sd/- Sd/- D. KARUNAKARA RAO PARTHA SARATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 17th September, 2019. SB आदेश की प्रनिलऱपप अग्रेपषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(Appeals)-1, Nashik. 4. The CIT-1, Nashik. , आयकर अऩीऱीय अधधकरण, “ए” बेंच, 5. ववभागीय प्रतततनधध ऩुणे / DR, ITAT, “A” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
तनजी सधचव / Private Secretary आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune.
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Date 1 Draft dictated on 17.09.2019 Sr.PS/PS 2 Draft placed before author 17.09.2019 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order