Decided on May 27,1982



T.D. Sugla, President - (1.) THESE two appeals, one each by the assessee and the ITO, relate to the assessee's assessment for the assessment year 1967-68. The assessee is a non-resident company. It filed its returns of income for the first time for the assessment year 1971-72, inter alia, disclosing a loss of Rs. 7,272. The assessment was completed on 1-7-1975 determining the total income at Rs. 33,120. Return for the assessment year 1972-73 was filed on 10-2-1976 disclosing dividend income on 21,000 equity shares held by it in an Indian company by the name Albright Morarji & Pandit Ltd. During the course of proceedings for the assessment year 1972-73, the ITO came to learn that the assessee-company has sold its technical know-how relating to its designs, drawings, specifications, etc., and also certain patents to the Indian company under an agreement dated 10-2-1966 and that in consideration thereof the Indian company had allotted 21,000 equity shares of Rs. 50 each out of its initial issue of shares to the assessee free of cost during the financial year ending on 31-3-1967.
(2.) The ITO felt that the aforesaid amount of Rs. 10,50,000 being the face value of the shares representing the sale price of the assessee's know-how, etc., was taxable and that income had escaped assessment on account of the assessee's not filing its return of income for the assessment year 1967-68. Accordingly, he initiated proceedings under Section 147(a) of the Income-tax Act, 1961 ('the Act'), and with the approval of the Commissioner issued a notice under Section 148 of the Act on 24-3-1976. In response thereto the assessee filed a return showing nil income. Thereafter there were hearings, notices were issued by the ITO and explanations were given by the assessee. Eventually, the ITO completed the assessment on 11-8-1980 computing the total income liable to tax under the head 'Capital gains' at Rs. 4,19,495. It is pertinent that the ITO found that the shares of the face value of Rs. 10,50,000 were received by the assessee in consideration of a number of items which included two Indian patents exclusively and irrevocrably on which no royalty was payable and that the consideration therefor was specifically given as Rs. 4,20,000 in the agreement. It is this amount which the ITO has considered as taxable under the head 'Capital gains'. As regards the cost of the aforesaid two Indian patents, the case of the assessee was that the cost was not determinable. Alternatively, however, the assessee claimed that the cost might be estimated at �1,000, i.e., Rs. 21,000. However, the ITO has taken the cost of the patents at Rs. 505 only, being the registration charges of the patents in India. The Commissioner (Appeals) has observed that even though the first ground of appeal was against the ITO's action in initiating proceedings under Section 147(a), Mr. Pawari had fairly not made any submissions as it was manifest that if there was any income liable to charge and there being no return filed by the assessee, the ITO's action would be eminently proper. On merits, it was contended that what was transferred by the assessee was nothing but a self-generated asset and, therefore, as held by the Bombay High Court in CIT v. Home Industries & Co. [1977] 107 ITR 609 the surplus, if any, would not be taxable. Reliance was also placed in this behalf on the Madras High Court's decision in the case of CIT v. K. Rathnam Nadar [1969] 71 ITR 433 and the Kerala High Court's decision in the case of CIT v. B.C. Jacob [1973] 89 ITR 88 (FB). However, for reasons given in paras 6 to 8 of his order, the Commissioner (Appeals) held that the consideration received for the patents was rightly taxed by the ITO to capital gains, As regards the cost, however, for reasons given in para 9 of his order, the Commissioner (Appeals) felt that the cost of the two patents could be reasonably taken at Rs. 21,000. Accordingly, he directed the ITO to modify the assessment.
(3.) BEING aggrieved by the aforesaid order of the Commissioner (Appeals), both the assessee and the ITO had come up in appeal before the Tribunal. There are two effective grounds in the assessee's appeal. They are against the initiation of the proceedings under Section 147(a) and against the taxability of the sum of Rs. 4,20,000 to capital gains being the sale price of the two Indian patents. On the other hand, the only ground in the departmental appeal is that the Commissioner (Appeals) was not justified in holding that a sum of Rs. 21,000 might reasonably be considered as the cost of the two Indian patents.;

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