ORDER
Bedi
1. This is a batch of two appeals by the revenue, in respect of same assessee, directed against the orders passed by the CIT(A), Patiala, dated 2-4-1990 for assessment year 1983-84 and dated 20-4-1990 for assessment year 1984-85, vide which he deleted the additions of Rs. 45,342 and Rs. 68,221 respectively for the two years under consideration, made by the Assessing Officer on account of tax liability received from Central Mechanical Engg. Research Institute, Durgapur, hereinafter referred to as CMERI.
2. Precisely, the facts are like this. The assessee was employed with CMERI, Durgapur from 1965-70. During this period, he researched on tractor technology and developed a novel hydraulic system for agricultural tractor. The rights of the invention were patented and assigned by the assessee to his employer, the CMERI, in August, 1970. Only after such assignment did CMERI become the exclusive owner of the rights under Patent numbers. These patents were thereafter further assigned by CMERI to NRDC, in terms of the standing agreement between CSIR and NRDC, for commercial exploitation.
The NRDC in turn gave right to use above know-how to M/s. Punjab Tractors Ltd. against payment of a lump sum and royalty. In the mean-time, assessee joined the said Punjab Tractors as Executive Director w.e.f. 27-6-1970. Thus, when assessee patents were assigned to CMERI in August, 1970, he was employed in Punjab Tractors Ltd. During the years under appeal, the assessee received a sum of Rs. 45,432 and Rs. 68,221 as royalty from CMERI, Durgapur and claimed this to be capital receipt. This was assessed by the then IAC(Assessment) as income from other sources. On appeal, the predecessor CIT(A) restored the matter to the file of the DCIT for adjudication afresh after affording proper opportunity to the assessee to substantiate its claim of non-taxability of royalty receipt. The assessee reiterated its claim that the royalty received was in consideration of a capital asset, Le. patented invention by the assessee and, accordingly was not taxable in view of the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty, [1981] 128 ITR 294/5 Taxman 1. The DCIT was not satisfied with the contention of the appellant and held that the amount received by the assessee had its ultimate nexus with his employment with CMERI, Durgapur and thus brought the amounts to tax as income from other sources.
3. The matter reached before the ld. first appellate authority once again before whom legal position with regard to Patent Rights was explained by way of filing a note from Shri M. G. Ramachandran, Advocate, Supreme Court of India. Besides, decisions of the ITAT, namely, Ahmedabad Bench-B, Balkrishna V. Doshi v. ITO, [IT Appeal No. 426 (Ahd.) of 1985], Bombay Bench in ITO v. SCA (P.) Ltd. [1984] Taxman 516 and Delhi Bench-E, Mool Raj Anand v. ITO, [IT Appeal No. 217 (Delhi) of 1986] were relied upon. The CIT(A) having considered these submissions as also the reliance of the assessee on the Supreme Court decision as well as the decisions of the ITAT, mentioned supra, held that the consideration received by the assessee on account of irrevocable assignment of capital assets was in the nature of capital receipt hence not taxable. The CIT(A) further relied on the comments from the well-known commentary on Income-tax by A. N. Aiyar, Second Edn., 175-177. Accordingly, the receipt was held not taxable and deleted both the additions.
4. The ld. D.R. relied upon the order of the Assessing Officer and further submitted that goodwill and patent right are two different things – dissimilar to each other, and cannot be equated. So income received by the assessee which relates to research work done by him while in the employment of CMERI is taxable as income from other sources which was rightly taxed by the Assessing Officer and ld. CIT(A) was not justified in deleting the same. He urged for restoration of Assessing Officer’s order.
5. The ld. counsel for the assessee, on the other hand, reiterated the submissions as made before the first appellate authority and on the basis of reasoning given by him urged for confirmation of his order.
6. We have heard both the parties, perused the record and the case law cited by the ld. counsel for the assessee before the ld. first appellate authority and are of the opinion that no doubt assessee has not spent anything for the said invention but the Organisation for which the assessee was working as a research scholar, had incurred huge amount and thus the patent right in fact belonged to the Organisation. The components invented/developed by the assessee did belong to the Organisation which was spending huge amount on its research and development, nevertheless the concern did pay him certain amount in lieu of his contributions. In this view of the matter, we are of the firm opinion that the amount received by the assessee was not capital receipt and was rightly assessed as income of the assessee from ‘other sources’. The CIT(A) has fallen in error in accepting the contention of the assessee. Accordingly, the orders of the CIT(A) for both the years under consideration are reversed and those of the Assessing Officer are restored.
7. In result, both the appeals of the revenue are allowed.
Bali
1. I have gone through the order proposed by my ld. brother but I am unable to agree with his reasoning as well as conclusion and for that I give my reasons and related facts as under.
2. Hearing in these two appeals in the case of the assessee Shri Chander Mohan who is the Managing Director of the Punjab Tractors Ltd. took place on 22-10-1996 and the appeals for allotted to my ld. colleagues the Judicial Member, for dictation, who has proposed the order dated 16-6-1997 wherein he has upheld the action of the Assessing Officer in taxing the amounts of Rs. 45,342 and Rs. 68,221 in the assessment years 1983-84 and 1984-85 respectively which additions were deleted by the ld. first appellate authority.
3. Briefly the facts relating to these two appeals are that the assessee Shri Chander Mohan, who is a Mechanical Engineer by profession, was working as an Assistant Director with the Council of Scientific Industrial Research (CSIR), Government of India, during April, 1965 to May, 1970 at their Central Mechanical Engineering Research Institute (CMERI), Durgapur. While working at CMERI, Shri Chander Mohan along with two others, namely, Shri Gursharan Singh and Shri Balbir Singh Devgun, invented a mechanism for the regulation of hydraulic circuit in tractors and the three of them made applications for getting the rights of the invention patented vide patent application Nos. 113114 and 113115 of 10-11-1967 and 116257 of 6-6-1968 in the name of Shri Chander Mohan and others. These patent applications were sealed on 15th October, 1969. Shri Chander Mohan along with his other two colleagues assigned the rights under the patents to their employer, the CMERI in August, 1970 and thereafter the CMERI became the exclusive owner of the rights under the above referred patent numbers. These patents were thereafter further assigned by CMERI to NRDC in terms of the standing agreement between the CSIR and NRDC for commercial exploitation. The NRDC in turn gave right to use the above know-how under the patents to M/s. Punjab Tractors Ltd. against the payment of lump sum and royalty. In the meanwhile the assessee Shri Chander Mohan joined M/s. Punjab Tractor Ltd. as Executive Director w.e.f. 27-6-1970. In the two assessment years under consideration, the assessee had received a sum of Rs. 45,342 and Rs. 68,221 from CMERI, Durgapur as royalty and claimed it as exempt in terms of a note appended to the statement of income and expenditure on the ground that this was in the nature of capital receipt in the hands of the assessee. The Assessing Officer however, held the amount of royalty received by the assessee as a revenue receipt in the hands of the assessee for both the assessment years under consideration.
4. The assessee appealed and the ld. CIT(A) vide order dated 9-10-1986 relating to assessment year 1983-84 set aside the issue with regard to the taxability of Rs. 45,342 to the file of the Assessing Officer for fresh adjudication and to consider the explanation offered by the assessee in terms of the letter dated 10-2-1971 from the Council of Scientific and Industrial Research to CMERI indicating the sealing of the patent No. 113115 dated 10-11-1967 on 15-10-1969 in favour of inventors S/Shri Chander Mohan, Gursharan Singh Rihal, and Balbir Singh Devgun together with the letter dated 27-5-1970 from M/s. L. S. Davar & Co. (Patent Attorneys) to PSIDC stipulating that they have searched about the patents assigned by CMERI to PSIDC and then to Punjab Tractors Ltd. and came to the conclusion that they were not infringing any existing patents. The Assessing Officer was also directed to consider the assignment of the patents in favour of CSIR as well as subsequent assignment to Commissioner of Patent, USA and to authority in Germany. Thereafter the Assessing Officer passed a fresh order dated 6-3-1989. Therein the Assessing Officer held that since the assessee was working as a Scientist with CMERI and during his tenure as a Scientist he invented certain tractor components. These had necessarily to be assigned to the patent organisation for which that Organisation was incurring huge expenses. According to the Assessing Officer, the assessee may not have incurred any expenditure for this invention but the Organisation for which he was working as a Scientist had incurred huge amounts and it was for that reason only that the patent was ultimately assigned to the organisation which in turn subsequently transferred the patent rights to M/s. Punjab Tractors Ltd. in which the assessee was working as a Managing Director. According to the Assessing Officer it appeared that CMERI agreed to pay certain amount to the inventor in lieu of his contribution made for research and development for the tractor components and on these facts, the assessee is not justified to claim that the amount received by him was capital receipt because the assessee had not parted with any capital asset. Accordingly the Assessing Officer held that the amount received was not a capital receipt at all and it had its ultimate nexus with the employment of the assessee with M/s. CMERI, Durgapur. According to the Assessing Officer since the amount was not assessable under any of the specified heads like salary, interest from securities, income from house property, profit and gains of business and capital gains, the same had to be assessed as income from other sources. Accordingly the Assessing Officer taxed the disputed amount as income from other sources.
5. The assessee appealed and the ld. CIT(A) after considering the submissions of the assessee which were furnished in the form of a note from Shri N. C. Ramachandran, Advocate of Supreme Court of India as well as the decisions of the ITAT Ahemdabad Bench in the case of Balkrishna v. Doshi’s (supra), Bombay Bench in the case of SCA (P.) Ltd. (supra) Delhi Bench in the case of Mool Raj Anand(supra) and the Supreme Court judgment in the case of B. C. Srinivas Setty (supra) held that the receipts were not taxable and deleted both the additions for both the years.
6. Aggrieved with the order of the ld. CIT(A), the Revenue has filed appeals and my ld. brother has held that the order of the ld. CIT(A) was not correct because no doubt the assessee had not spent anything for the invention, but the Organisation for which the assessee was working had incurred huge amount and thus the patent right in fact belonged to the organisation. According to him, the components invented/developed by the assessee did belong to the Organisation which was spending huge amounts on research and development and that organisation had paid the assessee certain amounts in lieu of his contribution. Accordingly my ld. brother held that the amount received by the assessee was not capital receipt and was rightly assessed as income of the assessee from other sources.
7. On these facts, I am of the opinion that the conclusion arrived at by my ld. brother is not correct because a patent is a capital asset. Patent royalties are payments, periodic or in lump sum, made for the user or assignment of a patent. Royalties for the user, past, present or future, of a patent agree taxable as income where there is a working licence and the transaction does not amount to an exclusive licence affecting the capital lights of the patentee. In the present case, the patentee is the CMERI and the income by way of royalty in lumpsum or periodical, is assessable only in the hands of the patentee and not in the hands of the assessee because the assessee assigned the patent rights irrevocably to CSIR/CMERI for which he had received certain amounts in the two assessment years under consideration and the assessee had no residential interest in the patent after such assignment. The consideration received by the assessee on account of such irrevocable assignment of patent, a capital asset, is in the nature of a capital receipt not taxable in view of the judgment of the Hon’ble Supreme Court in the case of B. C. Srinivasa Setty (supra). In the light of the above discussion and also for the reasons given in detail by the ld. CIT(A) in paras 2 to 2.9 of the impugned order, my findings are that the assessee along with two other co-inventors, acquired patent rights in, respect of invention of tractor components without any cost of acquisition to himself or to his other co-inventors. He did not lease/license these patents to CMERI/CSIR or any other party, on the contrary he along with his two other co-inventors, assigned the patent rights irrevocably to CMERI, a Central Government Laboratory. Thus it is clear that the assessee along with his two colleagues alienated the ownership of property rights in the patents once for all times and since the patent admittedly is a capital asset, any consideration received on its transfer is on capital account and, is taxable only under sections 45 to 48. But in view of the decision of the Hon’ble Supreme Court in the case of B. C. Srinivasa Setty (supra), the consideration by way of royalty cannot be taxed as there was no cost of acquisition to the assessee. Even if one accepts the reasoning and conclusion of the Assessing Officer, which has found favour with my ld. brother, Judicial Member, that CSIR/CMERI had incurred huge expenditure on scientific research which resulted in the invention of the tractor components by Chander Mohan and his two other colleagues who got the invention patented and assigned it to CMERI, the amounts received by CMERI on the exploitation of those patents on assignment are taxable receipts only in the hands of CMERI. Any further payment made by CMERI to Shri Chander Mohan or other co-inventors was only an application of the income earned by CMERI by the exploitation of patents and as such could not be taxed in the hands of the recipient inventors once again. Accordingly I will hold that the amount of Rs. 45,342 and Rs. 68,22.1 are not taxable in the hands of the assessee for both the assessment years under consideration. The order of the ld. CIT(A) is confirmed.
ORDER U/S 255(4) OF THE INCOME-TAX ACT, 1961
On a difference of opinion between the Members who heard these appeals, the following point of difference is referred to the Hon’ble President for the opinion of the third Member :-
Whether, on the facts and in the circumstances of the case, the amounts of Rs. 45,342 and Rs. 68,221 received from CMERI on account of invention of tractor components for asstt. years 1983-84 and 1984-85 are taxable in the hands of the assessee as held by the Judicial Member or the order of the ld. CIT(A) deleting these amounts from the income of the assessee should be confirmed as held by the Accountant Member ?
Third Member Order
1. On a difference of opinion between the Members constituting the Division Bench, the following point of difference has been referred to me by the Hon’ble President acting under section 255(4) of the Income-tax Act, 1961 :-
“Whether, on the facts and in the circumstances of the case, the amounts of Rs. 45,342 and Rs. 68,221 received from CMERI on account of invention of tractor components for asstt. years 1983-84 and 1984-85 are taxable in the hands of the assessee as held by the Judicial Member or the order of the ld CIT(A) deleting these amounts from the income of the assessee should be confirmed as held by the Accountant Member ?”
2. Before I proceed to decide the point of difference, I would like to categorically state that there is no difference between the ld. Members about the facts of the case but it would be appropriate on my part to summarise these as follows.
3. The assessee is a Mechanical Engineer by profession and he was working an Assistant Director with the Council of Scientific & Industrial Research (hereinafter referred to as CSIR), Government of India, during the period April, 1965 to May, 1970 at their Central Mechanical Engineering Research Institute (CMERI), Durgapur. During his tenure at Durgapur, the assessee along with two others invented a mechanism for the regulation of hydraulic circuit in tractors and the three of them filed applications for getting the rights of the invention patented in the names of Shri Chander Mohan, the assessee, and others. The applications were filed on 10-11-67 and 6-6-68 and these were sealed on 15th October, 1969. Shri Chander Mohan along with his two other colleagues assigned the rights under the patents to their employer Le. CMERI in August, 1970 and this institution thereafter became the exclusive owner of the rights under the various patent numbers assigned. These patents, however, did not continue with CMERI who in turn assigned them to NRDC in terms of a standing agreement between CSIR and NRDC for their commercial exploitation. The further fact is that NRDC in turn gave the right to use the know-how under the patents to M/s. Punjab Tractors Ltd. against payment of lump sum and royalty. The assessee Shri Chander Mohanbad in the meantime joined M/s. Punjab Tractors Ltd. as Executive Director with effect from 27-6-70. In the two assessment years under consideration i.e. 1983-84 and 1984-85, the assessee received sums of Rs. 45,342 and Rs. 68,221 from CMERI, Durgapur as royalty and claimed the same as exempt in terms of a note appended to the statement of income and expenditure. This was done on the ground that these were in the nature of capital receipts in the hands of the assessee. The Assessing Officer however, held otherwise taking the view that the amounts received were of a revenue nature in the hands of the assessee and, therefore, taxable for both the assessment years.
4. Being aggrieved, the assessee filed appeals to the CIT(A) who by means of an order dated 9-10-1986 relating to assessment year 1983-84 restored the matter back to the file of the Assessing Officer for fresh adjudication asking him to consider the explanation offered by the assessee in terms of a letter dated 10-2-1971 from the CSIR to CMERI indicating the sealing of the Patent dated 10th November, 1967 on 15th October, 1969 in favour of the three inventors which included the assessee and a letter dated 27-5-1970 from M/s. L. S. Davar & Co. (Patent Attorneys) to PSIDC. The Assessing Officer passed a fresh order on 6-3-1989 wherein he held that since the assessee was working as a Scientist with CMERI and during his tenure he had invented certain tractor components, these necessarily had to be assigned to the parent organisation for which the said organisation was incurring huge expenditure. According to the Assessing Officer the assessee may not have incurred any expenditure for the invention but the organisation for which he was working as a Scientist had incurred huge amount and it was for this reason only that the patent was ultimately assigned to the Organisation which in turn subsequently transferred the patent rights to M/s. Punjab Tractors Ltd. in which the assessee was working as a Managing Director. According to the Assessing Officer, it appeared that CMERI agreed to pay certain amounts to the inventor in lieu of his contribution made for research and development for the tractor components and on these facts the assessee was not justified in claiming that the amounts received by him represented capital receipts since the assessee had not parted with any capital asset. In the final analysis the Assessing Officer held that since the amounts received had direct nexus with the employment of the assessee with CMERI, Durgapur, the same could not be treated as capital receipts and since these were not assessable under any of the specified heads, he brought them to tax under the head “income from other sources”.
5. The assessee once again appealed to the CIT(A) who, after considering the facts of the case, the arguments of the assessee’s council and the case of the revenue as set out in the assessment order and duly taking into account the authorities cited before him, proceeded to hold that the receipts were capital in nature and, therefore, not taxable. I find it necessary to reproduce at this stage the relevant observations and reasons recorded by the CIT(A) to come to the conclusion that he did as follows :-
“2.5 I have considered the submissions made and find force in them. From the facts and submissions of the learned counsel as stated above, it is evident that the appellant assigned his patent rights irrevocably to CSIR for which he received consideration and that the appellant had no residual interest in the patent after such assignment. The consideration received on account of such irrevocable assignment of capital assets, is in the nature of capital receipt, not taxable in view of the judgment of the Supreme Court in the case of CIT, Bangalore v. B. C. Srinivasa Shetty referred to (supra). Reference is further invited to the following comments from the well-known commentary on Income-tax by A. N. Aiyar, Second Edition, Pages 175-177 :-
“Patent and know-how – Patents are assets of a capital nature. Patent royalties are payments periodical or in a lump sum made for the user or assignment of a patent. Where there is a working licence of a patent which does not amount to an exclusive licence affecting the capital rights of the patentee, the payment for it will be taxable as income : Rustproof Metal Window Co. Ltd. v. Inland Revenue Commrs. (1948) 16 ITR (Suppl.) 57, Commrs. of Inland v. Sangter [1919] 12 Tax Cas. 208, Brandwood v. Banker [1929] 14 TC 44, Handley Page v. Butterworth [1933-35] 19 TC 329, Wild v. Ionides [1925] 9 TC 392 and Anant Ram Khem Chand v. CIT [1937] 5 ITR 511. Such royalties would be income even though paid in a lump sum, Mills v. Jones [1929] 14 TC 769.
If the owner of a patent sells it or grants an exclusive licence to another whereby he is prevented from exercising his capital patent rights the royalty payment would in the recipient’s – hands be a capital receipt, Collins v. The Firth-Brearley Stainless Steel Syndicate Ltd. [1925] 9 TC 520. Anant Ram Khem Chand v. CIT [1937] 5 ITR 511.
Even in patent rights are parted with only for a limited period, a limited type of customer or a limited area, the payment would still be a capital receipt, Margerison Tyresoles Ltd. [1941] 25 TC 59 Withers v. Nethersole [1948] 16 ITR (Supp). 92.
In Anant Ram Khem Chand v. CIT [1937] 5 ITR 511, the assessee was the patentee of a tube-well boring strainer called the Khem Patent. The assessee granted to a company “full licence and authority to make”, strainers according to the specification of the Khem Patent and the company agreed to pay the assessee in consideration of the conveyance of the patent Rs. 4,500 per annum for the term set forth in the deed. In accordance with this agreement the assessee received Rs. 4,500 during the accounting year 1934-35. It was held in a construction of the agreement in question that the transaction was not a sale of the patent rights for an ascertained sum payable in instalments but only the grant of a working licence for a number of years on certain conditions, the property in the patent remaining in the grantee and the annual payment received by the assessee was therefore income. The learned judges observed in this case that if the transaction is an out and out sale of the patent, even though the price is not paid in lump sum but in instalments, the instalments received would not be income but capital receipts. But if it is merely a working licence for an annual payment it would be “income” and as such taxable”.
2.6 The case of the appellant is further supported by the three decisions of the Income-tax Appellate Tribunals relied upon by the learned counsel and referred to supra. In the first decision before the Ahmedabad. Bench of the Tribunal, the assessee therein was an individual, a practising architect as a proprietary concern. With effect from a particular date, the assessee transferred his proprietary business to a partnership firm and in the above arrangement a sum of Rs. 1,40,000 was determined payable towards expertise and technical know-how of the assessee. Separate consideration was also payable for goodwill (Rs. 1,00,000). The assessee claimed both the above receipts as exempt in view of the judgment of the Supreme Court in B. C. Srinivasa Setty’s case (supra). The department contended that it was revenue receipt. The Tribunal held as under :-
“Moreover, the ITO had rightly concluded that the technical know-how was a capital asset. Since the assessee had not paid anything to acquire such capital asset even the provisions of section 45 could not be attracted in view of the decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 2945 Taxman 1. Therefore, there was no difference whatsoever between this capital asset, i.e. technical know-how, and the goodwill which the assessee sold. Even though the ITO had proposed that goodwill sold by the assessee to the said firm should have been treated as capital gains, the IAC in his directions under section 144B had accepted the assessee’s submission. Therefore, no capital gains tax could be levied on the sale of self-generated goodwill or technical know-how.”
2.7 The second decision before the Bombay Bench of the Tribunal, amongst other things, the assessee transferred technical know-how to a subsidiary company for a consideration of Rs. 2 lacs. It was held that no capital gains was chargeable to tax for the transfer of technical know-how, which was a self-generated asset.
2.8 In the third case before the I.T.A.T., Delhi Bench, it was held that consideration for surrender of tenancy rights was not taxable in view of Delhi High Court judgment in Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 because tenancy right was a capital asset acquired without payment of any money and, as such, section 45 was not attracted.
2.9 In the light of the above discussion, my conclusion is that the appellant acquired patent rights without any cost of acquisition to himself; he did not lease/licence patents to CMERI or any other party, on the contrary, he assigned the patent rights irrevocably to CMERI, a Central Government Lab. In other words, he alienated the ownership of the property once for all times; a patent is a capital asset and consideration on transfer thereof (when not on adventure in the nature of trade) is on capital account and taxable under section 45-48 only, but in view of the clearly laid down law by the Supreme Court in the cases referred to supra, the consideration by way of royalty cannot be taxed as there was no cost of acquisition to the appellant. The addition of Rs. 45,342 is accordingly deleted. This ground succeeds and the appellant gets a relief of Rs. 45,342.”
The aforesaid reproduction is from the order of the CIT(A) for assessment year 1983-84 and for assessment year 1984-185, he followed the order for the preceding assessment year.
6. Being aggrieved with the orders passed by the CIT(A), the revenue appealed to the Tribunal and the matter was heard by the Division Bench. The ld. Judicial Member, who passed the initial order, took the view that the CIT(A) had “fallen in error” in accepting the contention of the assessee and he accordingly reversed his orders restoring those of the Assessing Officer. The two reasons recorded by him in para 6 of his order were : (1) Although the assessee had not spent anything for the invention, the Organisation for which the assessee was working had incurred huge amounts and thus the patent right belonged to the Organisation and (2) the employer paid the amounts in question to the assessee in lieu of his contribution towards the research and the consequent invention.
7. The ld. Accountant Member did not agree with the view expressed by the ld Judicial Member and proceeded to uphold the action of the CIT(A) for both the assessment year. His reasons for doing so can be summarised as under :-
1. A patent was a capital asset and patent royalties were payments, periodical or lump sum made for the user or assignment of a patent. Royalties for the user, past, present or future of a patent, were taxable as income where there was a working licence and the transaction did not amount to an exclusive licence affecting the capital rights of the patentee.
2. In the present case, the patentee was the CMERI and the income by way of royalty, whether periodical or lump sum, was assessable only in the hands of the patentee and not in the hands of the assessee who assigned the patent rights irrevocably to CSIR/CMERI for which he received certain amounts in the two assessment years under consideration and the assessee had no residual interest in the patent after such assignment.
3. The consideration received by the assessee on account of such irrevocable assignment of patent which was a capital assets was in the nature of a capital receipt and, therefore, not taxable in view of the judgment of the Hon’ble Supreme Court in the case of B. C. Srinivasa Setty (supra).
4. The assessee along with two other co-inventors acquired patent rights in respect of the invention of tractor components without any cost of acquisition to himself or to his other co-inventors.
5. He did not lease/license these patents to CMERI/CSIR or any other party; on the contrary, he along with his two other co-inventors assigned the patent rights irrevocably to CMERI, a Central Government Laboratory. It was clear that the assessee along with his two colleagues alienated the ownership of the property rights in the patents once and for all and since the patent was a capital asset, any consideration on its transfer was on capital account and taxable only under sections 45 to 48.
6. In view of the decision of the Hon’ble Supreme Court in the case of B. C. Srinivasa Setty (supra) the consideration by way of royalty could not be taxed as there was no cost of acquisition to the assessee.
7. Even if one were to accept the reasoning and conclusion of the Assessing Officer which had found favour with the ld. Judicial Member, namely, the incurring of huge expenditure on scientific research by the employer-institution, the amounts received by CMERI on the exploitation of these patents on assignment are taxable receipts only in the hands of CMERI. Any payment made by CMERI to the assessee or any co-inventors was only an application of the income earned by CMERI by the exploitation of patents and as such the same could not be taxed in the hands of the recipient investors once again.
8. I have heard both the parties at length – the ld. D.R. vehemently supporting the order passed by the ld. Judicial Member and the ld. counsel for the respondent supporting the view expressed by the ld. Accountant Member to maintain the relief given by the CIT(A). Both the parties agreed and stated before me that insofar as the facts were concerned, there was no difference of opinion between the ld. Members constituting the Division Bench and it is necessary for me to categorically record this accepted position in the present order as during the course of hearing, of this reference, the department had at one stage made submissions to the effect that certain further facts ought to have been examined and arguments were advanced as to whether the ld. Third Member could call for facts in deciding the reference. The matter was adjourned on one or two occasions and the parties were heard on this aspect of the matter and written submissions were filed. However, after some arguments from both the sides, the parties agreed and stated that they would not press this point further and that the difference be resolved on the basis of the facts found by the tax authorities and those noted by the two ld. Members constituting the Division Bench and on which there was no difference between them. The ld D.R. laid stress on the two reasons recorded by the ld. Judicial Member, namely, the incurring of expenditure by the employer-institution where the assessee was employed and the payments to him being in lieu of services rendered. According to her, the assessee being a Government servant had no option but to assign the invention to the Organisation and he did not become the owner thereof at any stage. I may, however, mention that this last argument cannot be considered; as this was never raised by any of the tax authorities or even considered by the ld. Members of the Division Bench. The ld. counsel for the assessee, on the other hand, stated that there was no evidence or proof with the department about the quantum of expenditure allegedly incurred by the Govt. institution for purposes of enabling the assessee to carry out the research leading to the invention and this aspect had proceeded entirely on presumptions and assumptions both in the order of the Assessing Officer and the opinion of the ld. Judicial Member. The further submission was to the effect that the assessee was an employee of the ‘institution and conducting research was not a part of the terms of appointment. Further, a patent was a capital asset and the same had been assigned irrevocably by the respondent to the Government institution and any receipt consequential thereto was a capital receipt and not a revenue receipt as held by the ld. Judicial Tviember confirming the view of the Assessing Officer to the same effect. In support of the various arguments the ld. counsel for the respondent reiterated reliance on the decision of the Hon’ble Supreme Court in the case of B. C. Srinivasa Setty (supra), as also another judgment of the Hon’ble Supreme Court in the case of Ahmed G. H. Ariff v. CWT [1970] 76 ITR 471 and lastly the decision of the Hon’ble Calcutta High Court in the case of CIT v. National Insurance Co. Ltd. [1978] 113 ITR 37.
The ld. counsel also placed reliance on the various decisions of the Tribunal which had been followed by the CIT(A) in his order.
9. After considering the rival submissions, I am of the view that the decision of the ld. Accountant Member is the correct one both on facts and in accordance with the provisions of law. The ld. Accountant Member has upheld the view taken by the CIT(A) on numerous grounds which I have already summarised earlier and in the earlier part of the present order I have also set out the detailed reasons recorded by the CIT(A) in coming to the conclusion that the receipts in question were on capital account and not revenue receipts eligible to tax. As rightly noted by the ld. Accountant Member and as argued before me by the ld. counsel for the respondent the department had no evidence about the expenditure incurred by the institution towards the research carried out by the respondent along with two others leading to the invention and the subsequent patenting of the same and it was purely on surmises and conjectures that it was observed that “huge expenditure” must have been incurred. No query was raised from the assessee in this direction. The ld. Judicial Member has held that the amounts given to the respondent by the parent Organisation were in lieu of his contributions but he has not appreciated the various findings of fact about the invention, its subsequent patenting, assignment to one institution and finally the assignment to M/s. Punjab Tractors Ltd. There is no finding in the order of the ld. Judicial Member as to the nature of the asset which had been assigned and that too irrevocably and he had also not taken into account the further fact that the same was assigned for commercial exploitation from time to time and the amounts earned on such exploitation being treated as taxable receipts only in the hands of the CMERI and not in the hands of the respondent or any other co-inventor. It may be mentioned that in para 2 of his order the ld. Judicial Member has categorically noted that the rights of invention were patented and assigned by the assessee to his employer i.e. CMERI in August, 1970 and it was only as a result of such assignment the CMERI became the exclusive owner of the rights under various Patent numbers. In spite of such a finding of fact one really cannot understand as to how a conclusion can be arrived at that the amounts received by the assessee were of a revenue nature. The ld. Judicial Member, who wrote the initial order, has not made any comment on the order of the CIT(A) which is a very-well reasoned order taking into account all the facts and the law on the subject. The distinction between assignment of a patent irrevocably and receiving some amount thereto and allowing user of the patent without an irrevocable assignment was not considered by the ld. Judicial Member but his aspect of the matter has duly taken note of by the ld. Accountant Member in his dissenting order. As rightly held by the ld. Accountant Member, the patent rights were acquired by the respondent and two others in respect of invention of tractor components without any cost of acquisition and these were not leased or licensed to CMERI/CSIR or any other party but the patent rights were irrevocably assigned to CMERI and this made the crucial difference in holding that the receipts were of capital nature and not on revenue account. As rightly held by the ld. Accountant Member, the decision of the Hon’ble Supreme Court in B. C. Srinivasa Setty (supra), was squarely applicable and the various decisions of the Tribunal referred to by the CIT(A) in his order are also apt on the point and to the same effect would be my observations in respect of the decisions cited by the ld. counsel during the course of hearing before me as a Third Member.
In the ultimate analysis, I uphold the view taken by the ld. Accountant Member to hold that the receipts were not taxable being on capital account.
10. The matter may now be listed before the Division Bench for passing an order in conformity with the majority opinion.
