Income Tax Appellate Tribunal - Mumbai
M.P. Ramchandran , vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "E", MUMBAI
BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN(J.M)
ITA NO.744/MUM/2005(A.Y. 2001-02)
ITA NO.5816/MUM/2005(A.Y.2002-03)
ITA NO.7031/MUM/2006(A.Y.2003-04)
ITA NO.7032/MUM/2006(A.Y.2004-05)
ITA NO.4365/MUM/2007(A.Y. 2005-06)
The DCIT, Cen. Cir.8,
Old CGO Bldg.Annexe,
M.K.Road, Mumbai - 20.
(Appellant)
Vs.
Shri M.P.Ramachandran,
44, Shivshakti Industrial Estate, Marol, Andheri (E),
Mumbai 400 059.
PAN:ADZPM 3832E
(Respondent)
Appellant by : Shri Hemantlal
Respondent by : S/Shri S.E.Dastur&
Sanjiv M. Shah
ORDER
PER N.V.VASUDEVAN, J.M,
ITANO.744/M/05 is an appeal by the revenue against the order dated 17/11/2004 of CIT(A),Central -II, Mumbai relating to the assessment year 2001-02. ITA No.5816/M/05 is an appeal by the revenue against the order dated 25/7/05 of CIT(A) Central-II, Mumbai relating to assessment year 2002-03. ITA No.7031/M/06 is an appeal by the revenue against the order dated 11/9/06 of CIT(A),Central -II, Mumbai relating to the assessment year 2003-04. ITA No.7032/M/06 is an appeal by the revenue against the order dated 11/9/06 of CIT(A),Central -II, Mumbai relating to the assessment year 2004-05. ITA No.4365/M/07 is an appeal by the revenue against the order dated 15/3/07 of CIT(A),Central -II, Mumbai relating to the assessment year 2005-06.
2. The only common issue in all these appeals by the revenue is as to whether the CIT(A) was right in deleting the royalty income assessed by the Assessing Officer in the hands of the assessee on the basis that royalty income accrued to the assessee during the previous year relevant to the Assessement years referred to above, by virtue of agreement with M/s. Jyothy Laboratories Ltd. ( M/s.JLL).
3. The facts and circumstances under which these appeals arise for consideration are as follows:
The assessee is an individual. The assessee is Managing Director of JLL. Originally the assessee was running a proprietary concern styled Jyoti Laboratories (JL), which started manufacturing of fabric liquid whitener popularly known as "Ujala" in the year 1983. M/s. JLL was incorporated in the year 1992. M/s. JLL started production of washing soap in October, 1999. As far as the manufacturing of fabric liquid whitener "Ujala" is concerned that was carried on by the proprietary concern of the assessee M/s. Jyoti Laboratories till 1999. Thereafter, the proprietary concern of the assessee M/s. Jyoti Laboratories was closed down the entire manufacturing activity of both the products fabric liquid whitener under the brand name "Ujala" and washing soaps were carried on by M/s. JLL.
4. We have already noticed that M/s. JLL started production of washing soaps in October, 1994. The assessee as proprietor of M/s. Jyoti Laboratories was the proprietor of the trade mark "Ujala" in respect of the goods liquid blue and liquid fabric whitener. The assessee as proprietor of M/s. JL granted a non exclusive licence to M/s. JLL to use the trade mark "Ujala" in respect of the liquid blue/liquid fabric whitener. The license to use the said trade mark was granted to M/s. JLL under an agreement dated 23/12/1994 for a period of 10 years. There was an option for renewal of agreement for further period as may be mutually agreed between the assessee and M/s. JLL. Some of the other terms of the agreement which are relevant for a decision on the issue involved in all these appeals are as follows:
a) Clause-15. "This agreement shall automatically come to an end if and when the relationship between the Proprietor and the Users cease to exist or the Proprietor cease to hold sufficient control over the standard and quality of the said goods manufactured by the Users under the trade mark UJALA and thereupon the Users shall not use the said trade mark."
b) Clause-16 (i). "The Users shall pay to the Proprietor in respect of this Agreement Technical knowhow/Royalty of 25 paise per bottle of UJALA 75 ml and proportionally higher or lower sum for various volumes of the product sold during each financial year commencing from the date of this Agreement."
(ii) The Users shall pay to the proprietor such advance as and when demanded by the latter which in any case shall not exceed 3 times of the technical know-how/royalty fee paid during the previous financial year in which the demand for advance has been made.
(iii) The users shall reimburse the proprietor on demand the following expenses which have been specifically spent with reference to the market covered by the Users.
Local advertisement like TV/Radio/Printing cost of POP material etc. Marketing staff expenses.
Any other direct marketing expenses.
The sum shall be determined from time to time with mutual deliberation & convent and all the expense should be supported by proper evidence and vouchers."
c) Clause-17. "It is hereby made clear that the Users shall have no right to acquire the said trade mark for any consideration whatsoever during the subsistence of this agreement."
d) Clause-19. "The proprietor shall ensure continuance of sufficient advertisement of the brand/the mark and the User shall abide by quality control standards prescribed by the proprietor after time to time inspection by him or by his agents."
e) Clause-20. "The User is not barred from making advertisement and sale promotional activities after obtaining the clearance from the proprietor. However, the user shall not any time claim any compensation or right in the brand/trade mark."
5. It is not in dispute that the assessee offered the income in the form of royalty received from M/s JLL upto 30/9/1999. Thereafter the assessee did not offer royalty income from M/s. JLL. The Assessing Officer in the course of assessment proceedings for A.Y 2001-02 called upon the assessee to explain as to why the royalty income from M/s. JLL was not shown in the return of income. In this regard the Assessing Officer pointed out that as per the agreement between the assessee and M/s. JLL the royalty was payable for a period of 10 years from 23/12/1994. In reply the assessee submitted before the Assessing Officer that after 30/9/1999 the assessee and M/s. JLL did not act upon the agreement dated 23/12/1994 in so far as it relates to payment of royalty by JLL to the Assessee. The assessee further pointed out that there were talks between M/s. JLL and M/s. Baring India Investment Ltd. (A company incorporated under the laws of Mauritius and hereinafter referred to as BIIL) who had shown interest to invest 10% of the paid up capital of M/s. JLL. The assessee being the Managing Director of M/s. JLL felt that it would be in the best interest of the company if the investment is made by BIIL, which would improve the interest of M/s. JLL and its further growth. It would have effect of increased turnover and profits of M/s. JLL. The assessee and members of the assessee' family were holding 90% of the equity capital of M/s. JLL and the benefit of increased turnover and profit of M/s. JLL will ultimately yield better income to the assessee which may surpass the royalty which assessee would receive from M/s. JLL. It was, therefore, decided by assessee and M/s. JLL not to act upon the agreement dated 23/12/1994 in so far as it relates to payment of royalty by JLL to the Assessee.
6. The assessee also further pointed out that as per the agreement dated 23/12/1994 M/s. JLL had to pay the assessee deposit determined on the basis of specific formula as per clause 16(ii) of the said agreement. Pursuant to the said clause in the said agreement M/s. JLL paid an aggregate deposit of Rs. 5.40 crores to the assessee in the financial year 1997-98 and 1998-99. The assessee pointed out that later on when shareholders agreement was entered into between BIIL and M/s. JLL on 17/11/1999, the assessee refunded Rs.5.40 crores received as deposit from M/s. JLL. The assessee also submitted that BIIL had as a condition for making the investment insisted that that royalty agreement between the assessee and M/s. JLL should be terminated. The assessee pointed out that after 1/10/1999 neither M/s. JLL claimed the royalty expenses nor did assessee offer royalty income from M/s. JLL to tax thereby confirming that the assessee and M/s. JLL did not want to act upon the agreement dated 23/12/94 in so far as it relates to payment of royalty by M/s. JLL to the assessee. The assessee thus submitted that the Assessing Officer cannot presume that royalty income had accrued to the assessee.
7. It is also relevant to point out in this regard that there was a search and seizure operation at the residential premises of the assessee as well as M/s. JLL under section 132 of the Act on 3/11/2000. In the block assessment which comprised of the block period including the period 1/4/2000 till 1/11/2000, for the period after Sept. 1999 till the end of the block period the question whether royalty income had accrued to the assessee and as to whether the same can be considered as undisclosed income in the hands of the assessee for the block period had come up for consideration before the ITAT in IT(SS)A 481/Mum/2003. In those proceedings also the assessee took a stand that after Sept.1999 the assessee did not receive any royalty income. The Tribunal had accepted the stand of the assessee that the royalty income cannot be assessed as undisclosed income for the block period. It is the stand of the revenue that the addition in the block assessment was deleted because the Tribunal considered that the royalty income cannot be considered as undisclosed income because that income had been shown in the books of account in the past and that was the reason why the Tribunal deleted the addition. According to the revenue the addition in the normal assessment is based on the fact that the agreement between assessee and M/s. JLL for payment of royalty continued to subsist and, therefore, there was accrual of income under mercantile system of accounting. According to the assessee the order of the Tribunal in the block assessment is also based on the finding that the agreement between the assessee and M/s. JLL had not been acted upon beyond Sept.1999 and, therefore, the decision of the Tribunal in the block assessment proceedings will also hold good in the regular assessment proceedings.
8. The assessee also pointed out that under the agreement between BIIL and M/s.JLL whereby BIIL agreed to subscribe 10% of the paid up capital of M/s.JLL at a premium of Rs.275 contained a specific clause namely clause 2.6 which provided as follows:
"2.6. All brands developed or to be developed will be exclusively the property of the company. Formal, goal setting and performance appraisal systems and training programs to be initiated in the company."
It is the contention of the Assessee that the brand name "Ujala" was to become property of JLL and this was also one of the reason why payment of royalty was not insisted upon by the Assessee.
9. The assessee further pointed out that under clause 3.2 of the aforesaid agreement assessee has to become the Chairman & Managing Director of M/s. JLL. The assessee as promoter of M/s. JLL also agreed that he will not act in any manner contrary to and against the interest of the investor namely BIIL. Under clause 4.4 of the aforesaid agreement it has been specifically provided as follows:
"4.4 that the Promoter hereby discloses that the group companies mentioned in Schedule II hold various assets in their name which shall stand transferred to the company within 180 days at a price to be determined in consultation and with the concurrence of the Investor."
10. In pursuance of the agreement, (a)JLL allotted 558250 equity shares of Rs. 10/- each(being 10% of its paid up capital) at a premim of Rs.275/- per share. (b) The Assessee had initiated the process of transferring the brand "UJALA" to JLL. It was pointed out that this fact would be evident from the copy of opinion on the brand transfer sought by JLL from an eminent counsel, which has been seized by the department during the search action on 3/11/2000 at the office premises of JLL. (c) JLL entered into an agreement with MPR appointing the later as chairman and managing director of JLL effective from 1/4/1999 for the period of 5 years. As the managing director of JLL, the Assessee had received remuneration, the details of which is as under:-
Financial Year Salary Commission Total 1999-2000 Rs.12,00,000
-
Rs. 12,00,000 2000-2001 Rs.48,00,000 Rs.68,69,457 Rs.1,16,69,457 2001-2002 Rs.57,60,000 Rs.92,42,846/-
Rs.1,50,02,846 That the above receipts have duly been recorded and offered by the Assessee MPR in his Return of Income. (d)(i) Further, The Assessee had discontinued his proprietary business JL in October 1999 and Deepty Road Lines("DR") other proprietary business in 2000-01. (ii) Initially when the Assessee had made available non-exclisve use of the brand "UJALA" to JLL, he had taken a security deposit of Rs. 5,40,00,000/-. Pursuant to the agreement with M/s. BIIL, the Assessee has returned back the said deposit to the JLL in financial year 1999-2000. (e) As per the terms of clause 4.4 of the agreement, the Assessee transferred the delivery vehicles owned by DP to JLL. It was the stand of the Assessee that BIIL has signed the agreement on 17/11/99 i.e. only after ensuring that (i) the Assessee stopped its proprietary business i.e. JL, (ii) JLL stopped paying royalty to the Assessee and (iii) JL stopped incurring advertisement expenditure. It was submitted that in view of the above there is no mention in the agreement regarding termination of royalty.
11. Without prejudice to the above submission, it was further submitted that under clause-19 of the agreement dated 23.12.1994 granting license to JLL to use the brand name "Ujala" there was an obligation on the part of the Assessee to provide sufficient advertisement of the brand/trade mark"UJALA". The Assessee stopped the advertisement of the brand UJALA after 1/10/1999. Since the Assessee failed to fulfill the condition prescribed in clause (19) of the agreement, he could not claim royalty as per the agreement.
12. The Assessing Officer however did not agree with the submissions made on behalf of the assessee. According to him the assessee was following mercantile system of accounting. Under the mercantile system of accounting one has to credit whatever is due whether received or not and debit whatever is to be paid where paid or not. The Assessing Officer thereafter referred to several judicial pronouncements for the proposition stated above namely Keshav Mills Ltd. vs. CIT 23 ITR 230 (SC), Maurvi Industrial Ltd. vs. CIT 82 ITR 835. According to the Assessing Officer for taxing income under the mercantile system, the most important factor is that it should become legally due i.e. when right or liability has ripened and become enforcible ( Shri Shajon Mills vs. CIT , 156 ITR 585 (SC)). According to the Assessing Officer the assessee was following mercantile system of accounting and, therefore, he ought to have credited royalty income as per the agreement between the assessee and M/s. JLL dated 23/12/1994. Thereafter the Assessing Officer discussed the contentions put forth on behalf of the assessee. He found that the assessee was offering for tax royalty income upto A.Y 1999-2000 as per the agreement dated 23/12/1994 with M/s. JLL. The agreement was valid for 10 years and, therefore, so long as M/s. JLL was selling the product 'Ujala" the assessee was entitled to the royalty at the appropriate rate subject to the size of the bottles. He was of the view that the agreement dated 23/12/1994 had not been cancelled. He rejected the contention of the assessee that as a result of BIIL agreeing to invest 10% of equity in M/s. JLL, the agreement between the assessee and M/s. JLL for payment of royalty came to and end. In this regard he also found that the brand name "Ujala" was ultimately transferred by the assessee to M/s. JLL only on 13/9/2002 and till such time the assessee continued to be owner of the trade mark 'Ujala". He also held that as per the agreement between M/s. JLL and BIIL there was no provision for termination of royalty agreement or even mention about the existence agreement for use of trade mark of the assessee by M/s. JLL. The argument that as per the licence agreement dated 23/12/1994 the assessee stopped incurring advertisement expenditure and this fact would come to show that the agreement dated 23/12/1994 was not acted upon was also not accepted by the Assessing Officer. With regard to the arguments of increase in salary and commission as a reason for giving royalty, the Assessing Officer held that salary and commission are paid for services rendered and has nothing to do with the royalty income.
13. The assessee has also furnished the copy of the letter from BIIL which is addressed to the Adll. CIT Rg.8, Mumbai, wherein they have confirmed about their investment in JLL, and also confirmed that they have stipulated certain conditions which inter-alia includes the stoppage of royalty. The AO however held that the condition laid down in this letter cannot alter the agreement entered between the assessee and JLL. According to the AO, these conditions may be the wishes and visual thinking of BIIL. But in absence of any condition for stoppage of royalty, included in the share holders agreement and termination of royalty agreement between the assessee and JLL, no legal sanctity can be accorded to the contention of BIIL as stipulated in the letter. He held that a legal right can be read and inferred for the concerned agreement and there is no place for the wishes of a third party. He held that the right and privilege of the assessee, towards sale of products utilizing his brand cannot be taken away by the wishes of a third party and hence the argument of the assessee stands rejected. IN this regard the AO also observed that BIIL is not a party to the royalty agreement and as far as the accrual of the royalty is concerned, the entity BILL is a rank outsider and the wishes or dictum of an outsider cannot make the existing agreement null and void. M/s. JLL, vide their letter dated. 5/2/2004, filed before the AO, had confirmed that no sum by way of royalty was credited to the account of the assessee and that no any provision was made in this regard. According to the AO, this was only an after thought and had been brought about by the assessee and his family members who control the affairs of the Company and therefore no congnisance can be taken about the contents of the said letter. The AO also referred to an action u/s. 132 on the business premises of the assessee, JLL, and at the residential premises of the assessee on 3/11/2000, and thereafter in the block assessment in the case of the assessee which was completed on 30/11/2002 royalty which accrued to the assessee upto 3/11/2000 amounting to Rs.3,12,45,751/- was added in the block assessment.
14. There after the Assessing Officer computed the royalty income on the basis of sales of bottles of various sizes. The total royalty so computed by the Assessing Officer was Rs. 7,25,39,247/-. The Assessing Officer added a sum of Rs. 3,12,45,751/- on a protective basis( because this was the proportionate royalty for the period 1/4/2000 to 3/11/2000 i.e. the date of search). A sum of Rs. 3,12,45,751/- was added on a substantive basis in the block assessment proceedings and on a protective basis in A.Y 2001-02. The remaining sum of Rs. 4,12,93,496/- was added on a substantive basis for A.Y 2001-02. On similar reasoning the following additions on account of royalty income was made in the other assessment years with the only difference being the addition was made on a substantive basis in the other assessment years, A.Y 2002-03 Rs. 7,51,02,992/-
A.Y. 2003-04 Rs. 6,09,18,252/- A.Y. 2004-05 Rs.4,68,07,868/- and A.Y 2005-06 Rs.3,05,97,337/-.
15. It has been mentioned that the agreement for payment of royalty between the assessee and M/s. JLL was dated 23/12/1994 for a period of 10 years. In those circumstances the payment of royalty would cease w.e.f. 22/12/2004. In A.Y 2005-06 the assessment was made in respect of the sales of the entire year. Reasons given by the Assessing Officer for adopting this approach was that under clause 2 of the agreement dated 23/12/1994 there was an option to renew the agreement for a further period. Under clause 17 of the said agreement it has further been provided that M/s. JLL shall have no right to acquire the said trade mark "Ujala" for any consideration during the subsistence of the agreement. According to the Assessing Officer contrary to the aforesaid terms in the agreement dated 23/12/1994, the assessee assigned the trademark "Ujala" along with good will to M/s. JLL under an assignment deed dated 13/9/2002 for a consideration of Rs. 1.00 crore. He, therefore, held that the assignment dated 13/9/2002 was null and void. He further held that because the assignment dated 13/9/2002 is null and void the assessee was the owner of the trademark and the royalty income would accrue to the assessee on the sales made by M/s. JLL of the products containing brand name "Ujala".
16. Before CIT(A) the assessee reiterated the submissions as were made before the Assessing Officer. The CIT(A) held that (i) The Assessee did not have enforceable right to receive royalty; (ii) The Assessee did not recognize income in the form of royalty receivable from JLL in his books nor did JLL book any expenditure of Royalty payable to the Assessee in its books, after the period from October 1999 onwards, as there was understanding not to pay royalty between the parties. (iii) During the course of search, in the statement U/s. 132(4), the Assessee had categorically stated that there was no royalty receivable from JLL. (iv) The Assessee after giving up the right to receive royalty, stopped incurring expenditure on advertisement which was materially large amount in the past, when the Assessee used to receive the Royalty from JLL. (v) Advance of Rs. 5.4 crores as per the agreement (clause 16(ii) of the Agreement dated 23/12/1994) was returned by Assessee to JLL. (vi) Confirmation from Baring India Investment Ltd. (BIIL) which brought in additional capital into the company JLL had been filed wherein it had affirmed that it had insisted upon the termination of the royalty payment to the Assessee by JLL as a pre-condition to bring in their fresh capital into JLL. (vii) An written agreement can be rescinded/modified orally (viii) As regards the seized paper containing the working of royalty receivable upto March 2000, it was not written by the assessee, but it was written by an employee of the company, who had, without the knowledge of the termination of the agreement to pay royalty, worked out as to how much royalty would be payable. (viii) After the stoppage of royalty payment by JLL, as a consequence of the outside party coming into the company JLL as a substantial shareholder, the Assessee had discontinued his proprietary business M/s. Jyoti Laboratories in October, 1999. (ix) Upto the A.Y 1999-2000, the assessee was not receiving any commission from the company JLL, as he was receiving royalty. But from the A.Y 2000-01 onwards, the assessee started receiving huge amounts of commission from the company JLL which was nothing but a compensation for the loss of royalty.
17. Thereafter the CIT(A) examined the question whether the written agreement could be varied by an oral understanding. After referring to the provisions of section 92 of the Indian Evidence Act 1872 the CIT(A) rendered a finding that it is possible to vary the terms of written agreement by an oral understanding. Finally the CIT(A) concluded that the agreement dated 23/12/1994 was rescinded by the parties and that hypothetical income cannot be brought to tax. Thus the addition made by the Assessing Officer in all the assessment years were deleted by the CIT(A).
18. Aggrieved by the orders of the CIT(A) the revenue has preferred the present appeals before the Tribunal.
19. We have heard the rival submissions. The Learned D.R. submitted that the Agreement between the Assessee and JLL for licensed use of the brand name owned by the former by the latter, was dated 23-12-1994 and was for a period of 10 years. Under this agreement royalty had to be paid by JLL to the Assessee according to the sale of various sizes of bottles of the products containing "Ujala" brand. The Assessee was following mercantile system of accounting and therefore in accordance with the turnover of JLL, royalty income would accrue to the Assessee. According to him the plea of the Assessee that the agreement dated 23-12-1994 was not acted upon, in so far as payment of royalty is concerned, after JLL entered into an agreement with BIIL cannot be believed. In this regard he drew attention to the order of the AO and submitted that the claim made by the Assessee in this regard was rightly not accepted by the AO. The submission of the learned D.R. in this regard were as follows:
The claim of the Assessee was that under an agreement dated 17-11-1999 BIIL agreed to subscribe to 10% of the equity of JLL at a premium of Rs.275 and that as a condition for doing so, BIIL insisted that the agreement dated 23-12-1994 should not be acted upon. In this regard, it has to be pointed out that the agreement dated 17-11-1999 was entered into by the Assessee, in his capacity as promoter of JLL owning 50,41,750 equity shares of Rs.10/- each of JLL in his name and the name of his family members and group companies. The shareholding pattern of Assessee and his family in JLL as on that date was;
No. of shares % ownership M.P.Ramachandran 35,00,980 69.44 M.G.Santhakumari 1,56,020 3.1 M.R.Jyothy 2,26,780 4.5 M.P.Divakaran 3,38,040 6.71 M.R.Deepthi 87,000 1.7 M.P.Sidharthan 2,51,300 5 U.B.Beena 1,72,330 3.42 M.K.Panjan 4,050 0.08 M.K.Sujatha 4,050 0.08 M.P.Ramachandran(HUF) 1,40,000 2.78 M.P.Divakaran(HUF) 95,200 1.89 M.P.Sidharthan(HUF) 66,000 1.3 -------------- ------------- Total 50,41,750 100 -------------- -------------
He submitted that if at all the agreement for payment of royalty was given up because of the agreement dated 17.11.1999, nothing prevented the parties from putting the same in writing in that agreement. In this regard he pointed out that various clauses in the agreement do not indicate any intention on the part of BIIL and Assessee that the agreement dated 23.12.1994 should be given up. He pointed out that clause 2.6 of the agreement dated 17.11.1999 on which the Assessee placed reliance only refers to brands developed or to be developed by JLL will be exclusive property of JLL and there is no reference to the brand "Ujala" which was owned only by the Assessee in his individual capacity. He referred to clause-4.4 of the agreement dated 17.11.1999 which provides as follows:
'That the promoters hereby discloses that the group companies mentioned in Schedule II hold various assets in their name which shall stand transferred to the company within 180 days at a price to be determined in consultation and wit the concurrence of the investor.' He pointed that in Schedule II there is a reference to JL the proprietary business of the Asessee but there is no reference to the brand "Ujala" owned by the Assessee.
He drew our attention to clause13.1 of the agreement dated 17.11.1999 which reads as follows:
" 13.1 This agreement superceeds all prior discussions, understandings and agreements between the parties and contains the entire agreement between the parties"
It was submitted by him that in the light of the above clause in the agreement and in view of the fact that there is no clause in the agreement which provides that the agreement dated 23-12-1994 between Assessee and JLL should not be acted upon, in so far as payment of royalty is concerned, only shows that prior to this agreement or at the time of entering into this agreement, BIIL did not insist that the agreement between Assessee and JLL dated 23-12-1994 should not be acted upon, in so far as payment of royalty is concerned.
It was submitted by him that the brand "Ujala" was ultimately transferred by the Assessee to JLL only under a deed of assignment of trade mark dated 13/9/2002 and till such time, there is every reason to presume that the agreement dated 23.12.1994 continued to subsist and consequently royalty income accured to the Assessee.
He submitted that neither there was a tri-party agreement between Assessee, JLL and BIIL or an agreement between the Assessee and JLL not to act upon the agreement dated 23.12.1994, in so far as payment of royalty is concerned.
It was next submitted by him that the fact that neither JLL recorded royalty expenditure in its books of account nor did the Assessee recognize income in his books of accounts would be immaterial. In this regard reliance was placed on the decision of the Hon'ble Supreme Court in the case of Maurvi Industries Ltd. Vs. CIT 82 ITR 835 (SC) wherein it was held that income accrues when it becomes due and postponement of the date of payment does not affect the accrual of income.
According to him all the surrounding circumstances pointed out by the AO in the order of assessment clearly go to show that income by way of royalty had in fact accrued to the Assessee.
The learned D.R. relied on the following judicial pronouncements:
CIT Vs. Shiv Prakash Janak Raj & Co. Pvt. Ltd. 222 ITR 583(SC) Wherein it was held that if a creditor passes a resolution not to charge interest on a loan due after the end of the accounting year, then income would accrue under the mercantile system of accounting.
CIT Vs. Ashokbai Chimanbhai 56 ITR 42 (SC). It was a case where an HUF was a partner in the firm entitled to share of profits of the firm. The HUF was disrupted and Karta in his individual capacity became entitled to the share of profits of the firm. The firm made up accounts only at the end of the calendar year. It was held that karta in his individual capacity was entitled to share of profits only at the time when accounts were adjusted. As on the date when the accounts were so adjusted HUF was disrupted and it was held that income accrued to the karta in his individual capacity and not to the HUF.
Western India Oil Distributing Co. Ltd. Vs. CIT 206 ITR 359 (Bombay). It was a case where after the close of the accounting year there was some waiver of interest and the Hon'ble Court taking note of the subsequent waiver came to the conclusion that nothing stopped accrual of income as on the last date of the previous year.
Sarabhai Chemicals (P) Ltd. Vs. CIT 257 ITR 355 (Guj) It was a case where there was a sale of industrial undertaking and business of two divisions of Assessee to its wholly owned subsidiary. The purchase consideration was payable in installments. There was an obligation to pay interest as per agreement dated 1-3-1977. The question was whether interest accrued for the accounting year from 1-7-1997 to 30-6-1978. The company had a resolution on 30-6-1978 waiving/postponing interest payment. The Hon'ble Court held that interest accrued under the mercantile system of accounting for the period before the act of waiver/postponement and cannot operate retrospectively.
H.P.Mineral & Industrial Development Corpn. Vs. CIT 302 ITR 120 (HP) A case of waiver of interest after the end of the accounting year and it was held that under mercantile system of accounting interest accrued and subsequent waiver does not stop accrual.
20. According to the learned D.R. it is a condition for an agreement to be enforceable in a court of law that it should be in writing. His submission was that the CIT(A) fell into an error by relying on proviso to Sec.92 of the Indian Evidence Act, 1872 and in this regard pointed out that facts of the case on which CIT(A) based his conclusions were different. We will not make any reference to these submissions because of the view that we have taken in the later part of this order that Sec.92 of the Indian Evidence Act, 1872 has no application to the present case.
21. The learned counsel for the Assessee submitted that when parties to an agreement confirm that they have decided not to act upon an agreement entered into between them, in so far as payment of royalty is concerned, the AO cannot say that such agreement still continues. According to him the AO is not a civil Court and has no authority to decide contractual matters between parties. In this regard he relied on the decision of the Hon'ble Calcutta High Court in the case of CIT Vs. Arun Dua 186 ITR 494 (Cal). In the aforesaid case the Company Law Board approved an agreement between the Assessee and its managing director for payment of remuneration of Rs.1,20,000. The issue was whether this includes perquisites or not. The parties to the agreement said that the salary was including perquisites but the AO took a stand that the remuneration of Rs.1,20,000/- was without including perquisites. The Hon'ble Calcutta High Court held that if the company and the employee had understood the agreement in a certain way and had acted upon that agreement, it was not open to the AO to give another interpretation and tax an Assessee on a hypothetical amount.
22. He then pointed out the following circumstances which would go to show that the Assessee and JLL intended that the agreement dated 23-12-1994 by which JLL agreed to pay royalty to the Assessee for use of the brand name "Ujala", should not be acted upon from November,1999. There was a search and seizure operation u/s.132 of the Act in the residential and business premises of Assessee and JLL on 3.11.2000. On 31.10.2000, the Assessee filed regular return of income for AY 2000-01. In the Tax Audit report in Form No.3CB filed along with the said return of income, the Assessee while describing the nature of business of the Assessee in column 8 (a) and (b) had given a note which is as follows:
" Note 1: Clause 8(a) & (b): Nature of Business:
The Proprietor was carrying on activities of Research - Development, Manufacturing, trading & Marketing of Liquid fabric whitener and also receiving royalty from Jyoty Laboratories Limited. The same is discontinued during the year. All the business activities were stopped during the year."
23. He further drew our attention to Profit and Loss Account for the year ended 31.3.2000 which contains an item of income under the head "other income" of Rs.2,03,93,711. The break of the above item of income includes Royalty income upto September, 1999 of Rs.1,67,42,840/-. He also drew our attention to the profit and loss account of JLL as on 31.3.2000 and pointed out that under the head "Selling and Distribution expenses", JLL has claimed a deduction of the very same amount of Rs.1,67,42,840/-.
24. He thus submitted that the fact that the that the Assessee and JLL intended that the agreement dated 23-12-1994 by which JLL agreed to pay royalty to the Assessee for use of the brand name "Ujala", should not be acted upon, in so far as payment of royalty is concerned, from November,1999 is duly reflected in the entries in the books of accounts of both the Assessee and JLL.
25. The learned Counsel raised a query that if the revenue says income has accrued in the hands of the Assessee then the corresponding expenditure by the same logic had to be allowed as deduction in the hands of JLL. Has JLL been allowed deduction of the very same sum as royalty expenditure?
26. He pointed out that in the return of income filed for the AY 01-02, JLL did not claim the expenditure under the head "Royalty". So also the Assessee in the return of income for AY 01-02 did not show income under the head "royalty".
27. According to him the above conduct of the parties would itself show that the Assessee and JLL intended that the agreement dated 23-12-1994 by which JLL agreed to pay royalty to the Assessee for use of the brand name "Ujala", should not be acted upon from November,1999.
28. He then drew our attention to the Agreement dated 17.11.1999 under which BIIL agreed to subscribe to 10% of the equity of JLL at a premium of Rs.275. He submitted that the Assessee did not account for royalty income from Nov. 1999 and it sounds reasonable that as part of the agreement by which BIIL agreed to subscribe to 10% equity of JLL, the Assessee agreed not to insist on receipt of royalty from Nov. 1999.
29. In this regard he pointed out that the Assessee got money by way of capital from BIIL and the fruits of prosperity to such flow of capital would be that of the Assessee as he and his family members hold 90% of the capital of JLL. Considering these facts it is reasonable that the Assessee and JLL agreed that no royalty would be paid to the Assesee. In this regard he also pointed out that the Assessee became Managing Director of JLL w.e.f. 1-4-1999 and received substantial increased remuneration and commission from AY 200-01 because of the change of circumstances.
30. According the learned counsel for the Assessee under clause 2.6 of the agreement dated 17.11.1999 between Assessee in his capacity as promoter of JLL and BIIL it has been provided as follows:
"All brands developed or to be developed will be exclusively the property of the company. Formal, goal setting and performance appraisal systems and training programs to be initiated in the company."
His submission was that the brand "Ujala" was developed by the Assessee and the above clause refers to the brand "Ujala" being made property of JLL. He raised a query as to whether in view of the above clause, is not JLL justified in refusing to pay Royalty to the Assessee?
31. He pointed out to yet another circumstance which would go to show that from Nov. 1999, the Assessee and JLL agreed not to insist on payment of royalty from Nov. 1999 as contemplated under the agreement dated 23.12.1994. As per clause 16(ii) of the agreement dated 23.12.1994, JLL has to pay the Assessee such advance as and when demanded. The Assessee had taken a deposit of Rs.5.40 crores in the Financial years 1997-98 and 98-99. After signing of the Agreement dated 17.11.1999 between Assessee and BIIL, this deposit was returned in Financial year 1999-2000. According to him this factor will also go to show that the Agreement dated 23.12.1994 was not acted upon by the Assessee as well as JLL.
32. Yet another circumstance pointed out by the learned counsel for the Assessee was the fact that BIIL by a letter dated 20-11-2002 addressed to the AO informed the AO that as a condition for making investment in the equity shares of JLL, it had insisted that royalty payment for "Ujala" brand by JLL to the Assessee should be stopped. Similarly JLL also filed a letter dated 5.2.2004 wherein it has been categorically mentioned that royalty payment to the Assessee was stopped with effect from 1.10.1999. The AO did not think it fit to cross examine BIIL or JLL on such stand. According to the learned counsel for the Assessee this was positive evidence in support of the Assessee's claim and could not be ignored by the AO.
33. He then drew our attention to the order of the ITAT in IT(SS)A.o.481/Mum/2003 wherein the issue of taxing the royalty income for the period from 1-11-1999 till 1-11-2000 had come up for consideration before the Tribunal. It was submitted by him the Tribunal after considering the statement recorded at the time of search u/s.132 of the Act on 4-11-2000 came to the conclusion that royalty income for the aforesaid period cannot be considered as undisclosed income. In the statement of the Assessee so recorded, the Assessee had in answer to Q.No.6 had categorically stated that BIIL insisted as a condition for their investment in the shares of JLL that JLL should stop paying royalty to the Assessee. In answer to Q.No.7 the Assessee had replied that funds were required for expansion of business and the revenue generated from more profits of JLL will be greater than the royalty that the Assessee will receive from JLL. In answer to Q.No.17, the Assessee had categorically stated that he was not receiving any royalty after October, 1999. The revenue found a paper containing calculation of royalty for FY 99-2000 and it was on that basis that the revenue proceeded to hold that royalty income continue to accrue to the Assessee even after Oct. 1999. This was not accepted by the Tribunal. According to him the findings of the ITAT was after considering the stand of the Assessee that royalty income was not payable after Oct. 1999 and also on the aspect that the same cannot be assessed as undisclosed income. According to him in view of the decision of the ITAT in the block assessment proceedings, the issue does not survive for consideration at all.
34. Further submissions were made on the applicability of Sec.92 of the Evidence Act, 1872. It was admitted that the said provisions do not apply to the present case at all. In this regard it was submitted that Sec.92 of the Evidence Act, 1872 applies only in disputes between parties to the agreement and the rule as laid down in Sec.92 of the Evidence Act, 1872, applies "as between parties" to the agreement. His submission was that parties to the agreement dated 23.12.1994 admit that the agreement was not acted upon after Oct. 1999 but it is only the revenue which wants to say that the said agreement continued. In those circumstances, it was argued that Sec.92 of the Evidence Act, 1872 will have no application and if for any reason the said provisions are held to be applicable proviso-4 to Sec.92 of the Evidence Act, 1872, will come to the rescue of the Assessee as held by the CIT(A).
35. Arguments were advanced on real income theory and cases relied upon by the learned D.R. were distinguished by pointing out that those were cases where the point of time when waiver of interest was made was after the accounting year, whereas in the case of the Assessee the waiver/rescission had occurred well within the end of the accounting period. The following judicial pronouncements were referred to:
H.M.Kashiparekh & Co. Ltd. Vs. CIT 39 ITR 706 (Bom). A case where the Assessee gave up managing agency commission because of insufficient profits after the end of the accounting year. Applying real income theory it was held that no income accrued.
Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746 (SC). A case where a electricity supply company maintained accounts under mercantile system of accounting. The consumers filed suits for reduction of tariff and ultimately the tariffs were reduced. Pending resolution of dispute whether income as per the rates original charged by the Assesee can be said to have accrued to the Assessee under the mercantile system of accounting was the question to be decided. The Hon'ble Supreme Court held that there was no accrual of real income even under the mercantile system of accounting.
The learned counsel submitted that there is a difference between waiver of income after its accrual and before accrual of income and on the facts of the present case, his submission was that there was no right to receive even prior to the relevant accounting period i.e., from Oct. 1999.
36. In his rejoinder the learned D.R. submitted that the Assessee claims that it became M.D. of JLL consequent to agreement dated 23-12-1999 with BIIL whereby they agreed to invest in 10% equity of JLL but the Assessee became M.D. as early as 1-4-1999. His further submission was that there was no Board resolution by which JLL decided that royalty will not be paid to the Assessee instead higher remuneration and commission will be paid or that the Assessee need not incur advertisement expenditure as per agreement dated 17.11.1994. He reiterated the stand of the AO regarding absence of clause in the agreement dated 23-12-1999 regarding BIIL insisting on JLL not pay royalty to the Assessee. According to him the theory of the agreement dated 23.12.1994 having been given up by JLL, in so far as payment of royalty is concerned and the Assessee after Oct. 1999 is a colourable device adopted by the Assessee avoid tax and such colourable devices cannot be allowed to be employed to avoid taxes and in this regard relied on the decision of the Hon'ble Bombay High Court in the case of Vodafone International Holdings B.V. Vs. Union of India and others 235 CTR (bom) 15. In this regard he highlighted that the Assessee and his family members held virtually the whole share capital of JLL and JLL and the Assessee are not different and the corporate veil of JLL has to be overlooked.
37. It was submitted by him that return of security deposit could be voluntary and there is no material on record to suggest that it was returned because the agreement was not acted upon between the parties. It was argued that the decision of ITAT is not on merits but on the principle that the income in question is outside the purview of the provisions of taxation as "Undisclosed Income". It was also highlighted that in the books of JLL royalty is claimed to have been paid till 27.11.1999 whereas the Assessee claims that it was paid only upto Sept. 1999. Though the figures of royalty tally the period does not tally as per the version of the Assessee and that of JLL.
38. The learned D.R. submitted that the decision of the Hon'ble Bombay High Court in the case of Shivpraksh Jank Raj & Co. Pvt. Ltd.(supra) was a case where there was an inbuilt clause in the agreement for termination. So also the case of CIT Vs. Arun Dua 186 ITR 494 (Cal). The decision of Hon'ble Supreme Court in the case of Dakeshwari Cotton Mills case (Infra) was referred to by the learned counsel for the Assessee for the proposition that technical rules of evidence were not applicable in income tax proceedings. According to the learned D.R. the proposition laid down therein was on applicability of principles of natural justice applicable to assessment proceedings.
39. The Learned Counsel for the Assessee clarified on the submission of the learned D.R. in his rejoinder about the fact that in the books of JLL royalty is claimed to have been paid till 27.11.1999 whereas the Assessee claims that it was paid only upto Sept. 1999. He highlighted the fact that the figures of royalty as shown by the Assessee and JLL tallies. The period from which royalty was stopped according to JLL was 27.11.1999 whereas the Assessee claims that it was from Oct. 1999. He submitted that the agreement between the Assessee as promoter of JLL and BIIL was signed on 17.11.1999 and this might be the possible reason why JLL put the date of termination of the agreement as 27.11.1999 instead of 17.11.1999. It was his submission that the revenue cannot rely on the discrepancy in the dates to show that the agreement, in so far as payment of royalty is concerned, continued. It was his submission that in any event according to the parties to the agreement there was no royalty payable after Nov. 1999. Since the figures tally there was no reason to take any adverse view.
40. We have considered the rival submissions. The Assessee follows the mercantile system of accounting. Under this method of accounting, profit is computed by bringing into credit what is due immediately it becomes legally due and before it is actually received. Likewise expenditure is debited when a legal liability has been incurred even before it is actually paid. In this case we are concerned about accrual of income i.e., bringing into credit what is due immediately it becomes legally due. The case of the revenue is that under the agreement dated 23.12.1994 royalty was payable on the turnover of "Ujala" brand products made by JLL. The agreement was for a period of 10 years. There was nothing to show that the agreement was terminated, in so far as payment of royalty is concerned and therefore income in the form of royalty would accrue each year based on the turnover of "Ujala" brand products made by JLL. The revenue wants to bring to tax receipts or income which is legally due though not actually received because the Assessee follows mercantile system of accounting. The case of the Assessee on the other hand is that the agreement between the Assessee and JLL for payment of royalty for use of brand name "Ujala", in so far as payment of royalty is concerned, did not subsist after Oct. 1999. The crucial question therefore to be decided is as to whether the agreement dated 23.12.1994 between the Assessee and JLL for payment of royalty for use of brand name "Ujala" subsisted after Oct. 1999. In this regard we observe that JLL continued to use the brand name "Ujala" even after Oct. 1999 and it was only the royalty payment that was not insisted upon by the Assessee.
41. Admittedly there is no written agreement rescinding or modifying the agreement dated 23.12.1994. The Assessee relies upon certain circumstances which go to show that the agreement dated 23.12.1994 did not subsist beyond Oct. 1999. The Assessee has affirmed before the AO that the agreement dated 23.12.1994 did not subsist beyond Oct. 1999. JLL who is the other party to the agreement confirms this fact by its letter dated 5.2.2004 filed before the AO. A third party viz., BIIL who wanted to invest in the shares of JLL had affirmed in its letter dated 20.11.2002 that at the time of entering into agreement dated 17.11.1999 it had as a condition for making investment in shares of JLL insisted that JLL should pay royalty to the Assessee. The AO has not chosen to cross examine either the Assessee, or JLL or BIIL on the above stand. The AO has proceeded on the basis of certain circumstances which would justify the conclusion that royalty income continued to accrue to the Assessee as the agreement dated 23.12.1994 and the said agreement continued to remain in force.
42. We will first examine these circumstances to see if the conclusions drawn by the AO as above were justified. The claim of the Assessee was that under an agreement dated 17-11-1999 BIIL agreed to subscribe to 10% of the equity of JLL at a premium of Rs.275 and that as a condition for doing so, BIIL insisted that the agreement dated 23-12-1994 should not be acted upon. The argument of the revenue is that if at all the agreement for royalty was given up because of the agreement dated 17.11.1999, nothing prevented the parties from putting the same in writing in that agreement. It was the argument of the D.R. that various clauses in the agreement do not indicate any intention on the part of BIIL and Assessee that the agreement dated 23.12.1994 should be given up. In this regard reference was made to clause-4.4 of the agreement dated 17.11.1999 which provides as follows:
'That the promoters hereby discloses that the group companies mentioned in Schedule II hold various assets in their name which shall stand transferred to the company within 180 days at a price to be determined in consultation and wit the concurrence of the investor.'
43. In Schedule II there is a reference to JL the proprietary business of the Asessee but there is no reference to the brand "Ujala" owned by the Assessee. Under clause13.1 of the agreement dated 17.11.1999 it is mentioned that the agreement supersedes all prior discussions, understandings and agreements between the parties and contains the entire agreement between the parties. Therefore the conclusion of the revenue was that prior to this agreement or at the time of entering into this agreement, BIIL did not insist that the agreement between Assessee and JLL dated 23-12-1994 in regard to payment of royalty should not be acted upon. The brand "Ujala" was ultimately transferred by the Assessee to JLL only under a deed of assignment of trade mark dated 13/9/2002 and till such time, there is every reason to presume that the agreement dated 23.12.1994 continued to subsist and consequently royalty income accrued to the Assessee because JLL was using the brand name "Ujala".
44. In our view the above circumstance would not be sufficient to conclude that the agreement dated 23.12.1994 between the Assessee and JLL for use of the brand name "Ujala" on payment of royalty continued. The parties to the agreement dated 23.12.1994 claim that payment of royalty under the agreement by JLL to Assessee was not insisted upon from Oct. 1999. It is not open to the AO to say that the obligation of payment of royalty to the Assessee by JLL continued even after that date when the parties to the agreement claim that such obligations did not subsist. Absence of a written agreement modifying the original agreement dated 23.12.1994 cannot be the basis to hold that income in the form of royalty continued to accrue to the Assessee. It is not the case of the AO that there was evidence to show that the Assessee actually received royalty from JLL even after Oct. 1999. The AO proceeds purely on a surmise that royalty income continued to accrue to the Assessee because there was no written agreement varying the terms of the agreement dated 23.12.1994. In other words there is no material on record to show that the agreement dated 23.12.1994, in so far as it relates to payment of royalty, continued to subsist even after Oct. 1999. In the light of the stand taken by the Assessee and JLL before the revenue authorities, can the Assessee seek to enforce claim for payment of royalty from JLL in a court of law. Will not JLL plead in such an action that the agreement dated 23.12.1994 regarding payment of royalty was not acted upon because of the fact that BIIL as a condition for investing in shares of JLL insisted that JLL should not pay royalty to the Assessee? In such proceedings can the Assessee turn around and say that JLL has to pay royalty? In our view the parties to an agreement are at liberty to vary its terms and so long as they agree on what terms of an agreement survive between them, it is not open to the AO to conclude to the contrary without sufficient material being available on record.
45. We will examine the applicability of Sec.92 of the Evidence Act, 1872 to the present case. Sec.91 of the Evidence Act, 1872 provides that when the terms of a contract, or of a grant, or of any other disposition of property, have been reduced to the form of a document, and in all cases in which any matter is required by law to be reduced to the form of a document, no evidence shall be given in proof of the terms of such contract, grant or other disposition of property, or of such matter except the document itself, or secondary evidence of its contents in cases in which secondary evidence is admissible under the provisions hereinbefore contained. Sec.92 of the Evidence Act, 1872 is an exception to Sec.91 of the Evidence Act, 1872 and it provides that when the terms of any such contract, grant or other disposition of property, or any matter required by law to be reduced to the form of a document, have been proved according to the last section, no evidence of any oral agreement or statement shall be admitted, as between the parties to any such instrument or their representatives in interest , for the purpose of contradicting, varying, adding to, or subtracting from, its terms.
46. As rightly contended by the learned counsel for the Assessee technical rules of evidence are not applicable in proceedings for assessment of tax liability as held in Dakeshwari Cotton Mills Ltd. Vs. CIT 26 ITR 775 (SC). Secondly the above provisions are relevant only in the context of dispute regarding the existence or non existence of an oral agreement altering the terms of a written agreement as between the Assessee and JLL. We fail to see its relevance in the proceedings for determination of tax liability. The provisions refer to inadmissibility of oral evidence to contradict, vary, add to or subtract from the terms of a written agreement " as between the parties to such instrument or their representatives in interest". Admittedly both Assessee and JLL agree that the terms of the written agreement between them have been altered orally. In such a situation we are of the view that the applicability of these provisions and conclusions of CIT(A) on the issue were not relevant.
47. The parties thought it fit to orally agree regarding non payment of royalty. The plea taken by the Assessee is fully supported by the circumstances pleaded by the Assessee which are discussed in the next paragraph of this order.
a) There was a search and seizure operation u/s.132 of the Act in the residential and business premises of Assessee and JLL on 3.11.2000. On 31.10.2000, the Assessee filed regular return of income for AY 2000-01. In the Tax Audit report in Form No.3CB filed along with the said return of income, the Assessee while describing the nature of business of the Assessee in column 8 (a) and (b) had given a note which is as follows:
" Note 1: Clause 8(a) & (b): Nature of Business:
The Proprietor was carrying on activities of Research - Development, Manufacturing, trading & Marketing of Liquid fabric whitener and also receiving royalty from Jyothy Laboratories Limited. The same is discontinued during the year. All the business activities were stopped during the year."
The Assessee duly declared royalty income upto Oct. 1999. Thus even prior to the search the stand of the Assessee was that the Assessee and JLL intended that the agreement dated 23-12-1994 by which JLL agreed to pay royalty to the Assessee for use of the brand name "Ujala", should not be acted upon from November,1999 and this fact is duly reflected in the entries in the books of accounts of both the Assessee and JLL.
Consequent to the agreement between Assessee in his capacity as promoter of JLL got money by way of capital from BIIL and the fruits of prosperity to such flow of capital would be that of the Assessee as he and his family members hold 90% of the capital of JLL. The Assessee became Managing Director of JLL w.e.f. 1-4-1999 and received substantial increased remuneration and commission from AY 2000-01 because of the change of circumstances.
As per clause 16(ii) of the agreement dated 23.12.1994, JLL has to pay the Assessee such advance as and when demanded. The Assessee had taken a deposit of Rs.5.40 crores in the Financial years 1997-98 and 98-99. After signing of the Agreement dated 17.11.1999 between Assessee and BIIL, this deposit was returned in Financial year 1999-2000.
BIIL by a letter dated 20-11-2002 addressed to the AO informed the AO that as a condition for making investment in the equity shares of JLL, it had insisted that royalty payment for "Ujala" brand by JLL to the Assessee should be stopped. Similarly JLL also filed a letter dated 5.2.2004 wherein it has been categorically mentioned that royalty payment to the Assessee was stopped with effect from 1.10.1999.
48. In the light of the above circumstances pointed out by Assessee, assertion by the Assessee and JLL that the obligation to pay royalty by JLL to Assessee ceased from Oct. 1999 and the absence of any positive material to suggest that the obligation of payment of royalty by JLL to Assessee continued even after Oct. 1999, we are of the view that the order of the CIT(A) deleting the addition made by the AO is justified and calls for no interference. The Assessee had no legal right to claim royalty on or after Oct. 1999 and therefore income does not accrue to the Assessee.
49. In view of our conclusions as above, we are of the view that the discussion of case laws on what is real income and when income accrues are all academic. If on facts it is found that there was a legal right to the Assessee to claim royalty only then the question whether accrual of income will stop because of the theory of real income will arise for consideration.
50. As far as AY 05-06 is concerned, we are of the view that there was no justification for the AO to have made the impugned addition of royalty income. Admittedly the agreement dated 23-12-1994 was only for a period of 10 years and had come to end during the previous year. The conclusion of the AO was that the agreement dated 23-12-1994 contemplated that JLL will have no right to acquire the trademark during the subsistence of the agreement dated 23-12-1994. Since JLL acquired trade mark in September, 1992 contrary to the said term in the agreement dated 23-12-1994, the transfer of trade mark is not valid and the Assessee continues to be owner of the trade mark and therefore royalty income would accrue to the Assessee. This line of reasoning in our view cannot be sustained. As already stated the parties to an agreement are at liberty to vary its terms and the revenue cannot be allowed to take a stand contrary to such intention. The other reasons given while deciding the appeals upto AY 04-05 will hold good for this assessment year also.
51. In the result all these appeals by the revenue are dismissed.
Order pronounced in the open court on the 4th day of Feb.2011
Sd/- Sd/-
(P.M.JAGTAP) (N.V.VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated. 4th Feb.2011
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
The CIT(A)- concerned 5. The D.R"E" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
Details
Date
Initials
Designation
1
Draft dictated on
27/01/2011
Sr.PS/PS
2
Draft Placed before author
31/01/2011
Sr.PS/PS
3
Draft proposed & placed before the Second Member
JM/AM
4
Draft discussed/approved by Second Member
JM/AM
5.
Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6.
Kept for pronouncement on
Sr.PS/PS
7.
File sent to the Bench Clerk
Sr.PS/PS
8
Date on which the file goes to the Head clerk
9
Date of Dispatch of order
PAGE 35
ITA .744 & 5816/M/05,7031,7032/M/06&4365/M/07