ORDER
1. C. SUDHIR, J.M.
The assessee in the aforesaid appeal has impugned the order dated 30th Nov., 1998, of the, learned Commissioner (Appeals)-III, Bangalore mainly on the following grounds :
(i)(a) The learned. Appellate Officer has erred in concluding the prohibition contained in the agreement dated 18th Jan., 1993 cannot prevent the appellant from imparting his technical knowledge of the process-“sustained release form” to others.
(b) The Appellate Officer has erred in concluding the prohibiting clause in the agreement has no bearing on the nature of transaction-whether ‘capital’ or revenue’.
(ii)(a) The learned Appellate Officer erred in concluding that appellant continue to avail himself, of the special knowledge “Manufacture of Pharmaceutical Products in sustained release form” and the appellant always remains entitled to use it inspite of the fact that the said knowledge has been sold out right to Mls Recon Pharma (P) ITD. on 18th Jan., 1993 and the knowledge has become inert.
(b) The learned Appellate Officer has failed to appreciate that in terms of clause 3(b) of the agreement dated 18-1-1993, the appellant is bound-to refund the amount of Rs. 40 lakhs no taxed as ‘revenue receipts’ if the appellant give to others the “process invented” or leaked out if any by the appellant.
(c) The Appellate Officer has erred in holding as revenue receipt, the amount of Rs. 40 lakhs received by appellant, being the consideration received for assigning to Recon Pharma (P) ITD. the ownership of – technical knowhow/process to “Manufacture of Pharmaceutical Products” in sustained release form.
(d) Hence, the amount of Rs. 40 lakhs now added as revenue receipt be deleted.
(iii)(a) The learned Appellate Officer has erred in concluding the amount of Rs. 40 lakhs is received by the appellant for rendering ‘services’ to the company Recon Pharma (P) ITD., and as such it is a revenue receipt when no “service” has been done by appellant.
(b) The learned Appellate Officer has erred in concluding the assignment of technical know-how-the process of manufacture of pharmaceutical products 0 in sustained form-is like consultation/professional advice given by Engineer, Doctor, Scientist, Advocate, etc., when the agreement indicates the appellant has not done “any service” to the Recon Pharma (P) ITD. for which Rs. 40 lakhs is paid.
(c) The amount of Rs. 40 lakhs received by the appellant now treated as revenue receipt on this ground be cancelled.
(iv) The Commissioner (Appeals) failed to appreciate that amount of Rs. 40 lakhs received from Mls Recon Pharma (P) ITD. is for assigning the ownership right of the appellant to the process/technical know-how-Manufacture of Pharmaceutical Products in sustained release form is on capital account and not a revenue receipt for the various reasons mentioned by the Hon’ble Mr. Justice Chandurkar in CIT v. Ralliwolf ITD. (1983) 32 CTR (Bom) 79: (1983) 143 ITR 720 (Bom). The same case is quoted by the learned Commissioner (Appeals) in support of his concluding the amount of Rs. 40 lakhs received is “revenue receipt.”
(v) The learned Commissioner (Appeals) has failed to appreciate before the amendment made in section 55 with effect from 1-4-1998, no tax is payable on the capital receipt of Rs. 40 lakhs as held by the Supreme Court in the case of CIT v. B. C. Slinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC).
Ground Nos. 1, 8 and 9 are formal one.
2. Sri G. Sarangan the learned counsel or the assessee while reiterating the grounds raised in the appeal submitted that the authorities below have failed to appreciate the, material fact that the appellant had sold, surrendered or has granted exclusive right of technical know-how to Mls Recon Pharma (P) ITD. which had disentitled the assessee-appellant from exercising or making use of invention and as such the amount of Rs. 40 lakhs received was a capital receipt; they also failed to appreciate that by virtue of the agreement M/s Recon Pharma (P) ITD., had become the owner of the invention, i.e., a process of manufacture of pharmaceutical products in substained release form and thus the appellant was prohibited in making use of it or giving the same to other manufacturers and thus the appellant had lost the right to invention and the amount received by the appellant was towards transfer of an asset and not on revenue account. The learned counsel referred to clause Nos. 2 and 5 of the agreement dated 1-10-1988 between the assessee and the manufacturer placed at page Nos. 7 to 8 of the paper book filed by the assessee and submitted that initially the manufacturer was agreed upon to pay royalty at 2 per cent of the selling price of the pharmaceutical products under the technical know-how agreed to be given by the assessee and a co-inventor for a period of 27 years from the date of release of first product so manufactured but later on they entered into another agreement dated 31-3-1989 placed at page Nos. 11 to 15 of the paper book wherein vide para Nos. 4 and 5, the manufacture had put a provision that inventor shall not give the technical know-how of the products mentioned in Annex. ‘B’ to any other person during the period of 27 years upto 31-3-2016.
3. The learned authorised representative further submitted that the manufacturer later on could realise that with the technical know-how given by the inventors, the company had developed many more products and if those products were released in the market as per programme projected by the company, the company will have to pay to the inventors more than Rs. 8 crores as a royalty and therefore the manufacturer negotiated with the investors to purchase the know-how for a lumpsum amount as consideration for a outright sale of their technical know-how suspending the earlier agreements for payment of royalty. In the process, the manufacturer succeeded and they purchased the technical know-how from the investors for an agreed consideration of Rs. 80 lakhs while treating the earlier agreements suspended, ineffective and unforceable with effect from 1-4-1992. Both the parties entered into a fresh agreement whereby the inventors sold the technical know-how of ‘Manufacture of Pharmaceutical Products in sustained Release Form’, developed by them to the manufacturer with their entitlement to hold and use the said process exclusively so long as they desire and earn and enjoy the profits or income therefrom peaceably and without any objection or interruption on the part of the inventors or persons claiming under them with declaration by the inventors that they will not give to others information of the process invented by them and if it is found the process has been leaked out by the inventors, the inventors shall refund the amount in consideration, i.e., Rs. 80 lakhs to the manufacture. Vide para 4 of the same agreement dated 18-1-1993 the inventors hav6 surrendered/foregone all the rights in the agreement dated 2-7-1991 and accordingly no royalty was payable to them from 1-4-1992, submitted the learned counsel while referring to page Nos. 23 to 26 of the paper book.
4. The learned counsel submitted further that the assessing officer had denied the claim of exemption mainly on the ground that the main intention of the assessee was to earn some income out of the technical know-how developed, therefore, it was to be termed as his ‘business income’ and it was assessable to tax. WIlile the Commissioner (Appeals) had also failed to appreciate the submission of the assessee in support of his claim. The learned counsel cited the judgments of the Supreme Court, High Courts and the Tribunals reported in,
(a) Oberoi Hotel (P) ITD. v. CIT (1999) 152 CTR (SC) 474: (1999) 236 ITR 903 (SC)
(b) CIT v. Associated Fibre & Rubber Industfies (P) ITD. (1999) 152 CTR (SC) 21 (1999) 236 ITR 471 (SC)
(c) Addl. CIT v. Dr. KP. Karanth (1983) 139 ITR 479 (AP)
(d) CIT v. Ralliwolf ITD. (1983) 32 CTR (Bom) 79: (1983) 143 ITR 720 (Bom)
(e) Dy. CIT v. Chander Mohan (1999) 65 TTJ (Chd)(TM) 240 : (1999) 70 ITD 33 (Chd)(TM)
He also cited the judgment in Nabin Chandra Narayan Das v. Dhenkanal Municipality AIR 1989 Ori 79 (FB) regarding the meaning of the word ‘use’ article in the context of know-how.
5. The learned counsel of the assessee submitted further that by entering into a fresh agreement and while accepting Rs. 80 lakhs (Rs. 40 lakhs each by the two inventors one of whom was the assessee), the assessee had sold the technical know-how to the manufacturer for all the time to come, with this condition that the inventors would not part with the know-how to others and in case of violation of this condition, the inventors would have to return the entire amount to the manufacturer and thus the inventors had lost their source of income. He also referred to the provisions of section 180A and section 55(2A) of the Income Tax Act and submitted that the provisions of the said section of the Act are not applicable as the section 55(2A) was not effective in the assessment year in question and provisions of section 180A of the Act are regarding to non-exclusive thing borne together several persons to use.
6. Sri Lucas Peter the learned departmental Representative on the other hand relied upon the order of the learned Commissioner (Appeals) and submitted that the assessee was a founder of Recon Pharma, a partnership firm wherein he was also a partner. He referred page No. 2 of the order of the Commissioner (Appeals) in support. He submitted further that before entering into the last agreement, the assessee had entered into several agreements wherein number of medicines to use the knowhow was increased and finally to get over the provisions of section 180A of the Act the assessee has been stated to have sold the know-how for lump sum amount. He submitted fu~her that during the third agreement between the parties Mls Recon Pharma became private limited but he is not aware as to whether the assessee is any shareholder therein or not. The learned departmental Representative submitted that the amount of Rs. 40 lakhs received by the assessee was actually revenue in nature as the assessee was not barred for giving the know-how to others to use it in other medicines. The learned departmental Representative referred to the judgments reported in,
(a) CIT v. CIBA of India ITD. (1968) 69 ITR 692 (SC)
(b) Addl. CIT v. Bhagwati Prasad 1978 CTR (All) 358: (1978) 114 ITR 682 (All)
(c) CIT v. Bharat Earth Movers ITD. (1985) 47 CTR (Kar) 244 : (1985) 155 ITR 321 (Kar)
(d) Alembic Chermcal Works Co. ITD. v. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC)
(e) CIT v. Indian Oxygen ITD. (1996) 134 CTR (SC) 372: (1996) 218 ITR 337 (SC)
(f) Monarty v. Evans Medical Supplies ITD. (1959) 35 ITR 707 (HL)
(g) Rolls Royce ITD. v. Jeffrey (Inspector of Taxes) (1965) 56 ITR 580 (HL)
and submitted that the judgments in Ralliwolf ITD.’s case and Chander Mohan’s case (supra) are not applicable in the present case as these have different facts and circumstances. While the judgment in Dr. K.P. Karanth (supra) is not applicable in the present case as in that case the assessee had surrendered his manufacturing right in favour of his employer. He submitted further that the judgments in Oberoi Hotel (P) ITD. (supra) is not applicable in the instant case as the assessee was not restrained to allow to use his formula by others for manufacturing of other medicines than the medicines manufactured by M/s Recon Pharma (P). ITD., using the know-how of the assessee. Likewise the judgment in Associated Fibre & Rubber Inds. (P) ITD.’s case (supra) is not applicable in the present case as it was the case of cancellation of agreement for which some compensation was paid, submitted the learned departmental Representative.
7. The learned counsel for the assessee in rejoinder however submitted that the judgments in Evans Medical Supplies’case and Rolls-Royce ITD.’s case (supra) rather support the case of the appellant-assessee.
8. We have considered the arguments advanced by the parties and gone through the records, order impugned herein as well as the judgments cited by the parties. The.main issue raised in the present appeal is as to whether the amount Rs. 40 lakhs received by the assessee was a capital or revenue receipt under the circumstances of the case. We find it not necessary to analyse herein as to whether the capital gains tax is leviable on the receipt of Rs. 40 lakhs by the appellant or not as the assessing officer has not levied capital gains tax nor anything has been uttered by him in this regard as it was the next step for him when it could have been held by the assessing officer that the receipt was capital one. It appears from the order impugned that the Commissioner (Appeals) has denied the claim of the assessee mainly on the ground that,
(i) The knowlidge gathered by the inventors (assessee and co-inventor) was like knowledge gathered by any other professional such as an Engineer, Doctor, Scientist, Advocate etc., and receipt of the appellant can very well be termed as fees for prescribing know-how to a limited company;
(ii) In the present case no capital asset was transferred as a matter of fact that there was no capital asset associated with the know-how of the appellant and, mainly because substantial amount has been received by him and merely because for the present, it is solitary transaction, it does not become a transaction in a capital asset; and
(iii) The prohibition contained in the agreement cannot prevent the appella nt from using his technical knowledge inasmuch as such prohibition cannot prevent him from using his own brains and therefore the prohibiting clause in the agreement between the appellant and AUs Recon Pharma (P) ITD. has no bearing on the nature of the transaction whether capital or revenue in the present case.
The learned Commissioner (Appeals) has relied upon the judgments in Ralliwolf ITD.’s case (supra).
9. There is no dispute that in the present case, know-how was developed by two persons through their professional experience and experiments. But we do not agree with the view of the Commissioner (Appeals) that the knowledge i.e., know-how gathered by them was like knowledge gathered by any other professional such as an Engineer, Doctor, Advocate etc., and the know-how of the appellant and of his uncle i.e., co-inventor is the know-how of a professional man. In our view know-how is different from mere knowledge. Know-how is related to invention. One who has knowledge of know-how is definitely different from the person who and experience or experiments. Services of a doctor or an engineer or an advocate or any other professional cannot be equated with inventors. These professionals may be upto date in their knowledge for applying a know-how invented by others for a remedy of the problems faced by their clients, for which remedy/solution they are charging fee in lieu of their services rendered to their clients. Here the persons have invented a know-how i.e., a pharmaceutical formula to prolong the effect of the medicine of the basis of their research works and knowledge. A doctor may give similar medicine or advice under similar diagnosis to different patient or an advocate may give similar advices to llis different clients facing similar problems. So while doing so they simply from their upto date knowledge, apply the remedies whatever prescribed in the medical or law books or journal. But the inventor of those medicines or law is different. Here in the case of the assessee vide agreement dated 18-1-1993 with the pharmaceutical company, he has sold his knowhow vide a solitary transaction for a one-time consideration, So the receipt of a fee by a doctor, or an advocate or any other professional for rendering his mere advice is different from the receipt of an inventor, who sells his invention. So a doctor applies this invention as a remedy to his client. There is no bar in case of a doctor or an advocate that they will not give similar advice or treatment to their different clients.
10. Thus the Bombay High Court in the case of Ralliwolf ITD. has held that the know-how is not strictly a fixed asset.and the nature of receipt from know-how would essentially depend upon the transaction out of which the receipts arise and context in which the receipts are received.
11. The facts of the case in the of Raly wolf ITD. (supra) are different from the present case as in the present case the inventor is not a trader rather he himself has sold the invention for all the time to a trader/manufacture with this condition that if the invention/assessee passes this know-how to others then he would be liable to return the amount in consideration to them. The principles laid down in the aforesaid decisions nevertheless help the assessee. The invention of the assessee is towards manufacturing technique, a know-how to prolong the effect of medicine. The observations of Lord Denning Musker v. English Electric Co. ITD. (1964) 41 Tax Cases 556 (HL) in this regard, discussed by the Hon’ble Bombay High Court in the aforesaid case is very relevant, which is as under :
“Know-how’ is an intangible asset, just as intangible as goodwill and just as worthy of recognition. It is a revenue-producing asset, just as goodwill is. ‘Know-how’ can be put to use so as to produce revenue in two ways. The manufacturer can use it himself to make things for sale and make profit in that way; or he can teach it to others, so that they can make their own things, in which case he gets paid for the knowledge and information which he imparts to them. His fees and rewards are then revenue in his hands. I assume, of course, that the manufacturer, although teaching it to others, still retains the knowledge himself and intends to go on using it himself and making things from it. So long as he does this, he retains his capital asset himself and is only using it to produce revenue. But ‘know-how’ can be used to produce a capital receipt. It can be sold outright and bring in a capital fund. This happens when a trader or manufacturer sells his goodwill or ‘know-how’ outright to a purchaser, withdraws from the business himself, and agrees not to use the ‘know-how’ or goodwill to the prejudice of the purchaser. The purchase price he receives is then capital in his hands.”
12. The facts of the case in the judgment of the Andlira Pradesh High Court in the case of Dr. K.P. Karanth (supra) are almost similar with the facts of the present case in, appeal, wherein the Hon’ble court was pleased to hold that payment received for giving up right to manufacture drugs is not revenue in nature nor the payment received for annulment of agreements whereunder royalty was due is revenue in nature. The Hon’ble court has held further that even assuming that the amount paid to the assessee was by way of compensation for abrogating or annulling the agreement already entered into in 1962, the position would not alter as under the terms of the compromise, the assessee was deprived of what in substance was his source of income.
13. In the case of Oberoi Hotel (P) ITD. (supra) the HonUe Supreme Court was pleased to hold as, where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue. In this case the assessee was managing a hotel belonging to another person, there was agreement between the two giving assessee first option of purchase or lease of hotel, the assessee received some amount for giving up such option, the question arose as to whether the amount received in compensation for loss of source of income was capital receipt or income. The Hon’ble court decided it as a capital receipt.
14. In the case of CIT v. Seshasayee Bros. (P) ITD. (1999) 151 CTR (Mad) 598 (1999) 239 ITR 471 (Mad), the Honble Madras High Court was pleased to hold that the amount received by the assessee on cancellation of consultancy agreement resulted into loss of source of income of assessee was a capital receipt as the agreement was one for consultancy services and there was no principal and agent relationship between the parties.
15. And in the case of Chander Mohan (supra), in an almost identical facts with the instant case, the Third Member of the Tribunal has agreed with the view of the AM who had held 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 considerations 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 pkent which was a capital asset 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. Skinivasa 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/licence these patents CMERI/CSIR or any other party; on the contrary, ” along with his two other conventors 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 learned JM, viz., 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.”
16. In the case of Nabin Chandra Narayan Das (supra) the Full Bench of the Hon’ble Orissa High Court has discussed and defined the word ‘use’. The HonUe court was of the view as in essence, therefore, there is a grain of the ingredient of the ‘right’ which a purchaser acquires on a completed transaction of sale . . . . . . . . … The learned counsel for the assessee had cited this judgment in relation to use of an article in the context of know-how. Regarding the meaning of ‘use’ the Hon’ble court has observed as under :
…… I respectfully agree, that although a change in the article would be indicative of ‘use’ there may be user also without any noticeable change as in the iristances mentioned earlier. Whether or not, there would be a change in the article would depend upon the nature of the article and the purpose of its employment or use. It may well be that the article is such and the purpose for which it is brought in is such that a change in the article is to be expected if it is used. The relevant factors to be considered whether or not there has been user of an article therefore are the nature of the article and the manner in which it is dealt with or the purpose for which it is employed.”
17. The judgments cited on behalf of the department, are not applicable in the present case as these have different facts and circumstances than the case of the assessee. In, the judgment reported in CBA of India ITD. (supra) the assessee had merely ‘access to the technical knowledge and experience in the pharmaceutical field which the Swiss Company commanded, the assessee was on that account a mere licensee for a limited period of the technical knowledge of the Swiss Company with the right to use the.patents and trademarks of that company, the assessee had acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of the pharmaceutical products, upon the technical knowledge of the Swiss Company for a limited period; by making that technical knowledge available the Swiss Co ‘ any did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business. In the judgment reported in the case of Bhagwati Prasad (supra), the Hon’ble.Aflahabad High Court was pleased to hold that the Tribunal was justified in holding that the transaction did not represent an adventure in the nature of trade, while in the judgment in Bharth Earth Movers ITD. (supra) the issue before the jurisdictional High Court was as to whether the expenditure was capital or revenue and there the assessee was a manufacturer. Likewise, in the judgments reported in Alembic Chemicals Works Co. ITD. and Indian Oxygen ITD. (supra), the issue before the Hon’ble court was as to whether the expenditure was business or revenue one and in both the cases the assessee was a manufacturer/trader.
18. The assessees were in manufacturing business in the case reported in Rolls-Royce ITD. (supra). In that case the issue was as to whether certain lump sum paid and to receipt by the appellant- company M/s Rolls-Royce ITD., by virtue of certain licensing agreement were to be executed in computing for tax purpose, the profits or gains of the appellant’s trade on the ground that those lump sum were of a capital nature. The House of Lords held that the sums in question will be so included as being part of the receipt of the company’s trade; the company was not parting with its assets but trading in them as part of the development of its general trade. While as per Lord Radcliffe, “know-how” is not a single physical entity but is the kind of intangible entity that can easily change its character according to the use to which the owner decides to put it. In the case reported in Evans Medical Supplies (supra), the appellant- company carried on the business of manufacturing chemists and wholesale druggists entered into an agreement with the Government of Burma, by which the company agreed to assist the Government in establishment and operation of a pharmaceutical industry, under the terms of Part-I of the agreement entered into on 20th Oct., 1953 the company was to supply technical data and designs for the erection of the factory and the installation of machinery required for the manufacture of the pharmaceutical products, they were also to disclose to the Government, the secret processes used by them in the preparation, storage and packaging of the various pharmaceutical products. These processes had never been disclosed before to anyone else, and during the seven years’ currency of the agreement the company agreed not to disclose them to anyone else in Burma. By Part II of the agreement the company agreed to manage the factory, to train native personnel and to provide the necessary staff meanwhile. The company was permitted to continue its agency in Burma, but that agency would become of less value as the Burmese Government established their own industry, the consideration for the agreement was a lump sum payment of 1,00,000 pounds together with an annual fee of not less than 25,000 pounds for the obligation to operate and manage the factory during the currency of the agreement. The Commissioners for the Special Purposes of the income-tax held that the sum “arose to the company either in the course of the trade which it had hitherto carried on or in the course of a new trade which it commenced to carry on, on 20th Oct., 1953; they upheld an assessment to income-tax in respect of the company’s profits as wholesale druggists for the year 1954-55 under Case I of Schedule D, the sum of 1,00,000 pounds being treated as a receipt of its trade liable to be included in the computation of its profits. On appeal to the House of Lords it was held that the 1,00,000 pounds was not properly included in the assessment because the finding of the Commissioners in the alternative form was not sufficient to impose liability on the company, since, if the sum was received in the course of a new trade, it could not be brought into the assessment made in respect of the company’s existing trade for 1954-55 which was the only assessment in question. The assessment, accordingly could not be upheld. Viscound Simonds and Lord Tucker were of opinion that the 1,00,000 pounds was a capital receipt. Lord Keith of Avonnolin and Lord Denning were of opinion that it was an income receipt. Lord Morton of Henryton was of the opinion that it was in part of capital receipt and in part an income receipt.
19. Under the aforesaid facts and circumstances we are of the view that the written agreement between the parties i.e., the assessee and the manufacturer, is the best document to examine the issue as to whether the receipt in question was capital or business receipt in the hands of the assessee. The company had entered into a fresh and last agreement dated 18th Jan., 1993 with the assessee under this background that with the technical know-how given by the inventors, the company had developed many more products and if those products were released in the market as per programme projected by the company, the company had to pay to the inventors more than Rs. 8 crores as royalty. The company therefore approached the inventors including the assessee to purchase the know-how of manufacturing pharmaceuticals products in sustained release form for a lump sum amount superseding the earlier agreement of payment of royalty. The inventors agreed to sell the knowhow to the company for an amount of Rs. 80 lakhs (Rs. 40 lakhs to each inventors). With this condition, the company shall be entitled to hold and use the said process exclusively so long as they desire and earn and enjoy the profits or income therefrom peaceably and without any objection or interruption on the part of the inventors or persons claiming under them and with this further condition that the inventors would not give to others the information of the process invented by them and if it is found the process has been leaked by the inventors, tlae inventors shall refund the amount of Rs. 80 lakhs hereby given and accordingly a written agreement dated 18th Jan., 1993 was executed and entered into between the parties. It appears from this document that the inventors had sold their know-how to the company for all the time to come for a lump sum amount and the inventors were not entitled to sell or pass the said know-how to others as they were no more the owner of the said know ‘ -how. We therefore, do not agree with the submission of the learned departmental Representative that the assessee was at liberty to sell the know-how to other companies to, use the know-how for making different sets of medicines. Because in the agreement dated 18th Jan., 1993 placed before us there is nothing written that the inventors had sold the know-how to the company i.e., Mls Recon Pharma (P) ITD., for manufacturing of a particular set of medicines only. Even in the earlier agreement dated 2-7-1991, the parties had named seven products in Annex. 1 to the said agreement wherein the know-how of the inventors was put to use by the manufacturer but it was supplemented with the wordings “and other products in sustained release form” which are released by Mls Recon Pharma (P) ITD., before 30-9-1993. But, it appears from the agreement dated 18-1-1993 (cl. 4, p. 4) that the inventors had surrendered/foregone all the rights in the, agreement dated 2-7-1991 and accordingly no royalty was payable to them from 1-4-1992.
20. We thus do not agree with the view to Commissioner (Appeals) in para No. 5.3 that the knowledge acquired by the appellant through his education, professional training and research cannot be taken away through an agreement, the prohibition contained in the agreement cannot prevent the appellant from using his technical knowledge inasmuch as, such prohibition cannot prevent him from using his own brain and therefore the prohibiting clause in the agreement between the appellant and M/s Recon Pharma (P) ITD. has no bearing on the nature of transaction-whether capital or revenue in the present case. If the assessee travels beyond the clause of agreement and sells its know-how to others, ‘the department is not handicapped to take appropriate action and assess the appellant accordingly. We thus are of the opinion that the receipt in question in the hands of the assessee was capital receipt. The contrary findings of the assessing officer as well as the Commissioner (Appeals) that the receipt amounting to Rs. 40 lakhs in the hands of the assessee was his business income is therefore set-aside. The assessing officer is directed to deal with the matter afresh treating the said receipt of Rs. 40 lakhs in the hands of the assessee as capital receipt.
21. In result, the appeal is allowed.