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Commissioner of Income-tax Vs. Associated Stone Industries (Kotah) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Income-tax Reference No. 24 of 1970
Judge
Reported in(1979)12CTR(Raj)67; [1981]130ITR868(Raj)
ActsIncome Tax Act, 1922 - Sections 10(2), 18A, 18A(6), 18A(8), 30 and 34(1)
AppellantCommissioner of Income-tax
RespondentAssociated Stone Industries (Kotah) Ltd.
Appellant Advocate S.C. Bhandari, Adv.
Respondent Advocate S.M. Mehta, Adv.
Cases ReferredIn Kantamani Venkata Narayana and Sons v. First Addl.
Excerpt:
- - ito [1961]41itr191(sc) .it was held by the tribunal that the assessee-company had disclosed all relevant or material facts and as there was no failure on the part of the assessee-company to disclose fully and truly any relevant material necessary for the assessments in respect of the years in question, the necessary pre-requisite conditions for invoking the jurisdiction for reassessment under section 34(1)(a) of the act were absent. 1. 8. it is well settled that proceedings for reassessment under section 34 of the act could be initiated if on account of the omission or failure on the part of the assessee-company to disclose fully and truly all material facts necessary for its assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for.....dwarka prasad, j.1. this is a consolidated reference made by the income-tax appellate tribunal, bombay bench ' c ', bombay (hereinafter referred to as ' the tribunal '), under section 66(1) of the indian i.t. act, 1922, by which seven questions have been referred to this court.2. we may briefly state the facts, which have given rise to this reference application.3. the associated stone industries (kotah) ltd. (hereinafter referred to as ' the assessee-company ') was incorporated in the then indian state ofkotah on january 17, 1945, as a public limited company for carrying on the business of quarrying stones. the then maharao of kotah state granted a lease to the assessee-company on may 2, 1945, for a period of 15 years beginning from october, 1944. clause 18 of the lease agreement entered.....
Judgment:

Dwarka Prasad, J.

1. This is a consolidated reference made by the Income-tax Appellate Tribunal, Bombay Bench ' C ', Bombay (hereinafter referred to as ' the Tribunal '), under Section 66(1) of the Indian I.T. Act, 1922, by which seven questions have been referred to this court.

2. We may briefly state the facts, which have given rise to this reference application.

3. The Associated Stone Industries (Kotah) Ltd. (hereinafter referred to as ' the assessee-company ') was incorporated in the then Indian State ofKotah on January 17, 1945, as a public limited company for carrying on the business of quarrying stones. The then Maharao of Kotah State granted a lease to the assessee-company on May 2, 1945, for a period of 15 years beginning from October, 1944. Clause 18 of the lease agreement entered into by the assessee-company with the then Maharao of Kotah for quarrying flooring stones was as under :

' 18. (i) In consideration of the concessions and privileges granted by the GRANTOR and in lieu of income-tax, super-tax and excess profits tax, the GRANTEE covenants to pay to the GRANTOR royalty on the stone excavated at the rate of rupee one per 100 sq. ft., subject to the minimum amount of Rs. 1,50,000 per financial year, provided that the aforesaid rate of Re. 1 per 100 sq. ft., will be operative so long as the selling rate of unpolished slabs does not exceed Rs. 10 per 100 sq. ft.; in the event of the selling rate going above this figure the royalty per 100 sq, ft. shall be increased by 25% of the excess over ten rupees.

(ii) The minimum royalty will be payable in four equal instalments in advance every quarter. Provided that if in any quarter the royalty payable calculated at the rate mentioned in sub-para. (1) exceeds the instalment of minimum royalty paid in advance for that quarter, the balance shall be made up within the next quarter. '

4. The Kotah State merged with the United State of Rajasthan and the Indian I.T. Act, 1922, was brought into force in the newly formed State of Rajasthan with effect from April 1, 1950. The assessee-company submitted an application to the Commissioner of Income-tax for a declaration that it was exempt from the payment of income-tax in accordance with the terms of the lease granted to it by the then Maharao of Kotah. But the aforesaid application was rejected. Thereafter, the assessee-company filed a civil suit in the court of the District Judge, Kotah, against the Union of India and the State of Rajasthan, seeking a declaration that it was exempt from payment of income-tax and that the royalty paid by it in excess of the minimum amount of Rs. 1,50,000 was in lieu of income-tax, super-tax, etc. The learned district judge by his decree and order dated August 23, 1957, held that the royalty which was paid by the assessee-company to the State of Rajasthan, in accordance with the provisions of Clause 18 of the grant, consisted of two parts, namely, the sum of Rs. 1,50,000 represented royalty proper, while the remaining amount of royalty paid by the assessee-company was in lieu of income-tax, super-tax and excess profits tax. According to the learned district judge, the State of Rajasthan was entitled to the minimum royalty of Rs. 1,50,000 as, according to him, the said amount was attributable to the concessions and privileges granted by the Government to the assessee-company, while the remaining amount paid by the assessee-company, in excess of Rs. 1,50,000, was further divisible into two parts consisting of the amount paid in lieu of income-tax, super-tax and excess profits tax, which was payable to the Union of India by way of federal taxes on incomes or profits, while the amount left by way of residue, out of the amount paid by the assessee-company under Clause 18 of the grant after the deduction of the income-tax, super-tax and excess profits tax, shall be payable to the State of Rajasthan. Thus, the State of Rajasthan was held entitled to the minimum royalty amount of Rs. 1,50,000 while the Union of India was held entitled to the amount equal to the tax liability of the assessee-company in respect of the federal taxes out of the excess royalty paid in that year, and the State of Rajasthan was held entitled to the residue left out of the total amount paid by the assessee-company under Clause 18 of the grant. The learned district judge, however, dismissed the suit against the Union of India. An appeal was preferred by the State of Rajasthan against the aforesaid decree and order passed by the learned district judge, Kotah, which was partly allowed by this court. The High Court held that the agreement dated May 2, 1945, became void on the coming into force of the Constitution of India on January 26, 1950, or from April 1, 1950, as it granted monopoly rights to the assessee-company for quarrying stones in the specified areas and that the royalty was payable thereafter by the assessee-company to the State of Rajasthan in accordance with the provisions of the Rajasthan Miner Mineral Concessions Rules. The High Court also held that the amount paid by the assessee-company to the State Govt. of Rajasthan, in excess of the amount payable by way of royalty, was refundable to the assessee-company. We have been informed by the learned counsel for the parties that an appeal in the matter is still pending before the Supreme Court of India. We may, however, note that although the suit of the assessee-company was dismissed by the learned district judge, Kotah, as against the Union of India, yet the assessee-company did not prefer any appeal in that matter before the High Court, with the result that the order passed by the learned district judge, Kotah, had no binding effect so far as the Union of India is concerned.

5. The ITO, in the assessments for the years 1950-51 to 1956-57, disallowed the deduction of the minimum royalty amount of Rs. 1,50,000 from the taxable income of the assessee-company on the ground that the same was capital expenditure, while deduction of royalty paid by the assessee-company in excess of Rs. 1,50,000 was allowed. The same position was maintained by him in respect of the assessments for the assessment years 1957-58 to 1961-62. In the year 1959, notices for reassessment of tax, under Section 34(1)(a) of the Indian I.T. Act, 1922, were issued for the assessment years 1950-51 to 1956-57. The ITO reassessed the income of the assessee-company for the years 1950-51 to 1956-57 and held that as the amount of royalty paid by the assessee-company in excess of the sum of Rs. 1,50,000 was in lieu of income-tax, etc., the same could not be allowed as deduction to the assessee-company and as such the amount of excess royalty allowed earlier as deduction was disallowed and was added back to the income of the assessee-company. The assessee-company preferred appeals before the AAC against the aforesaid orders of reassessment passed by the ITO, Kotah, but the appeals were dismissed. Then the assessee-company filed appeals before the Income-tax Appellate Tribunal, which disposed of seven appeals relating to the reassessment proceedings made under Section 34(1)(a) of the Act, for the assessment years 1950-51 to 1956-57, by one consolidated order dated September 7, 1968. The Tribunal held that the proceedings under Section 34 of the Act would not be initiated in view of the decision of their Lordships of the Supreme Court in Calcutta Discount Co. Ltd, v. ITO : [1961]41ITR191(SC) . It was held by the Tribunal that the assessee-company had disclosed all relevant or material facts and as there was no failure on the part of the assessee-company to disclose fully and truly any relevant material necessary for the assessments in respect of the years in question, the necessary pre-requisite conditions for invoking the jurisdiction for reassessment under Section 34(1)(a) of the Act were absent. The Tribunal further held that the proceedings for reassessment for the assessment years 1954-55, 1955-56 and 1956-57, although initiated within a period of four years from the date of the original assessment for those years, yet because such proceedings were initiated under Section 34(1)(a) of the Act, they could not be upheld as having been made under Section 34(1)(b) of the Act. The Tribunal also held that the portion of the excess royalty paid by the assesse-company to the State Govt., which was equivalent to the tax liability of the assessee-company, could not be held as permissible deduction, as the income-tax and other taxes were payable to the Union Govt. However, the remaining portion of the excess royalty, which was left out by way of residue, after deducting the amount paid in lieu of tax liability by the assessee-company, out of the excess royalty, was permissible deduction on the basis of the principles laid down by their Lordships of the Supreme Court in Gotan Lime Syndicate v. C1T : [1966]59ITR718(SC) . It was further held by the Tribunal that the royalty paid on polished stones, in accordance with the provisions of Clause 19 of the agreement, constituted a part of the cost of the stones and is a permissible deduction, being an expenditure of revenue nature. The Tribunal lastly held that the assessee-company was entitled to the credit of that portion of the royalty, which was paid by it in lieu of income-tax and super-tax liability of the assessee-company. By another order passed on September 7, 1968, the Tribunal allowed the appeals preferred by the assessee-company in respect of the assessmentyears 1957-58 to 1961-62, holding that a sum of Rs. 1,50,000, as the minimum amount of royalty payable by it, was expenditure of revenue nature and was a permissible deduction and that out of the excess royalty paid by the assessee-company, the residue left, after payment of the amount equivalent to income-tax, super-tax, etc., to the Union Govt., was also revenue expenditure and was a permissible deduction although the amount of excess royalty representing its liability in respect of income-tax, super-tax and other direct taxes payable to the Union of India could not be deducted from the taxable income of the assessee-company, adopting the reasoning given by it in the earlier order passed on the same day, which has been referred to above.

6. The Commissioner, Rajasthan, Jaipur, submitted applications under Section 66(1) of the Act in respect of all the 12 appeals decided by the Tribunal by its two orders dated September 7, 1968, relating to the assessment years 1950-51 to 1961-62, and at the request of the parties, the Tribunal agreed to submit a joint and consolidated statement of the case to this court. It was thus, on the applications under Section 66(1) of the Act, that the Tribunal has made a consolidated statement of the case and has referred the following seven questions to this court by its order dated September 24, 1969 :

' 1. Whether, on the facts and in the circumstances of the case, the reassessments for the years 1950-51 to 1956-57, were validly made under Section 34(1)(a) of the Indian Income-tax Act, 1922 ?

2. Whether, on the facts and in the circumstances of the case, the revenue was entitled to contend that reassessments for the years 1954-55, 1955-56 and 1956-57 were validly made under Section 34(1)(b) of the Act ?

3. Whether, on the facts and in the circumstances of the case, the residue out of the excess royalty, i.e., royalty amount paid in excess of the minimum royalty of Rs. 1,50,000 remaining after meeting the income-tax and super-tax liability, of the assessee-company in the assessment years 1950-51 to 1956-57, was a permissible deduction ?

4. Whether, on the facts and in the circumstances of the case, the royalty paid on the polished stones was a permissible deduction in the assessment years 1950-51 to 1960-61 ?

5. Whether an appeal can lie against an order levying penal interest under Section 18A of the Act for the assessment years 1957-58 to 1961-62 ?

6. Whether the assessee-company was entitled to a credit of the amount of excess royalty paid which is held to be in lieu of the income-tax and super-tax liability of the company ?

7. Whether, on the facts and in the circumstances of the case, the payment of royalty in excess of Rs. 1,50,000 paid under Clause 18 of the lease granted by the Government of His Highness the Maharao Saheb of Kotah on May 2, 1945, which has been held to be in lieu of income-tax, super-tax, etc., by the District Judge, Kotah, is a permissible deduction in the assessment years 1957-58 to 1960-61 ?'

7. We shall now proceed to deal with the aforesaid questions seriatim.

Question No. 1.

8. It is well settled that proceedings for reassessment under Section 34 of the Act could be initiated if on account of the omission or failure on the part of the assessee-company to disclose fully and truly all material facts necessary for its assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year or have been underassessed or assessed at too low a rate. Thus, two conditions must be satisfied in order to confer jurisdiction on the ITO to issue notice under Section 34(1)(a) of the Act, namely :

(i) the ITO must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment or have been under-assessed or assessed at too low a rate ; and

(ii) he must have reason to believe that such non-assessment or under-assessment has been caused by reason of the omission or failure on the part of the assessee-company to disclose fully and truly all material facts necessary for his assessment for that year.

9. Now, in the present case, the assessee-company at the time of original assessments pertaining to the years 1950-51 to 1956-57, which were the subject-matter of reassessment proceedings, claimed that the entire amount paid by it by way of royalty were exempted from payment of income-tax, super-tax or excess profits tax. Even in the suit filed by the assessee-company in the court of the District Judge, Kotah, on December 15, 1953, the case set up by the assessee-company was that in consideration of the stipulations contained in Clause 18 of the agreement, the assessee-company acquired an exemption from the levy, assessment or collection of income-tax, super-tax or excess profits tax. The assessee-company prayed, in the plaint filed by it in the court of the District Judge, Kotah, that it may be declared that during the continuance of the grant dated May 2, 1945, the Union of India was not entitled to recover from the plaintiff, assessee-company, the income-tax, super-tax and excess profits tax. The assessee-company also obtained an interim injunction order dated December 18, 1953, from the District Judge, Kotah, restraining the Union of India and its officers from levying, assessing or collecting income-tax, super-tax or excess profits tax, if any, against the petitioner-company, in respect of its income from the business carried on by it under the grant dated May 2, 1945. Itwas only on the representation made by the Union of India that the aforesaid interim stay order was later on modified, by the order of the District Judge, Kotah, dated February 18, 1956, to the effect that the assessments for income-tax, super-tax, etc., relating to the assessee-company may be made, but recovery of taxes that may be assessed and demanded for the assessment years 1950-51 and onwards was stayed till the disposal of the suit. Ultimately, the suit filed by the assessee-company was dismissed so far as the Union of India was concerned with the result that the judgment passed by the District Judge, Kotah, on August 23, 1957, had no binding effect, so far as the rights of the Union of India relating to the recovery of income-tax and other taxes from the assessee-company were concerned.

10. The District Judge, Kotah, made a reference to the High Court as to whether the provisions of Clause 18 of the grant, made in favour of the assessee-company by the then Maharao of Kotah, created any legal obligation not to levy income-tax, etc., on the income or profits of the assessee-company for the duration of the grant and whether the obligation contained in the aforesaid Clause 18 of the said grant not to levy income-tax, etc., devolved upon the Union of India and the Indian I.T. Act, 1922, was not applicable to the assessee-company. The High Court decided all these issues against the assessee-company and on appeal their Lordships of the Supreme Court affirmed the decision of the High Court. It was held by the Supreme Court in Associated Stone Industries (Kotah) Ltd. v. Union of India : [1963]49ITR92(SC) that the grant dated May 2, 1945, was not law and that the same did not continue as such after the Finance Act, 1950, was enforced, which extended the Indian I.T. Act, 1922, to the territories of the State of Rajasthan, including the former State of Kotah. Thus, the right of the Union Govt. to levy, assess and recover income-tax, super-tax and excess profits tax from the assessee-company was contested by it until it was set at rest by the aforesaid decision of their Lordships of the Supreme Court. The claim of the assessee-company before the ITO was that the entire amount paid by it on account of royalty was exempted from payment of income-tax and other federal taxes. It was not disclosed by the assessee-company before the ITO, in the course of the original assessment proceedings, that a part of the amount paid by it under Clause 18 of the lease agreement or grant was paid not by way of royalty proper but was paid in lieu of income-tax, etc. A perusal of the assessment orders collectively marked as annex. 'E' go to show that even in the revised returns filed by the assessee-company before the ITO, it gave a note to the following effect in respect of the amount of royalty :

' Being claimed exemption from the Indian income-tax, super-tax under the terms of the lease dated May 2, 1945, granted by His Highness the Maharao Saheb, Kotah.'

11. The same argument was also repeated by the assessee-company in its forwarding letter dated December 22, 1954. Thus, the fact that the amount paid by the assessee-company by way of royalty to the State of Rajasthan had a component, which was paid by it in lieu of income-tax and other taxes, was never disclosed by the assessee-company before the ITO, during the initial assessment proceedings.

12. The argument advanced by the learned counsel for the assessee-company before us was that the ITO must be aware of the stand taken by the assessee-company in the suit filed by it in the court of the District Judge, Kotah, as an order of injunction was issued by the district judge prohibiting the ITO from proceeding with the assessment of the company which was latter modified so as to allow the ITO to complete the assessment proceedings but not to realise the taxes from the assessee-company and that the existence of the aforesaid orders should lead to the conclusion that the ITO was aware of the proceedings in the suit pending in the Court of the District Judge, Kotah. There can be no doubt that on account of the fact that an injunction order, which was passed by the District Judge, Kotah, and the modified injunction order passed by him subsequently, were served on the ITO, he must have been aware of the pendency of the suit in the court of the District Judge, Kotah, but it is not the case of the assessee-company that a copy of the plaint filed by it in the court of the District Judge, Kotah, was ever submitted to or made available by the assessee-company to the ITO. It must also be pointed out that the ITO, was not a party to the said suit, which was filed by the assessee-company in the court of the District Judge, Kotah, as there were only two parties thereto, namely, the Union of India and the State of Rajasthan. In these circumstances, it cannot be held that the ITO must have been aware of the contents of the plaint filed by the assessee-company in the court of the District Judge, Kotah, or pleas taken therein. Besides that, as the case of the assessee-company before the ITO was that the assessee-company was exempted from payment of income-tax and other taxes, on account of the terms of the agreement dated May 2, 1945, the ITO could not have known that in the suit filed by the assessee-company it had pleaded an alternative case to the effect that the amount of royalty paid by it included a portion which was allegedly paid in lieu of income-tax and other taxes. It was then argued by the learned counsel for the assessee-company that a copy of the lease agreement dated May 2, 1945, was placed before the ITO by the assessee-company. But as held by their Lordships of the Supreme Court in Kantamani Venkata Narayana and Sons v. First Addl. ITO : [1967]63ITR638(SC) the duty of the assessee to disclose fully and truly material facts necessary for the assessment of the relevant year is not discharged by merely producing the books of account or other evidence. The assesseemust bring to the notice of the ITO particular items in the books of account or portions of documents which are relevant. It was clearly implicit that under the provisions of Sections. 23 and 34 of the 1922 Act, the assessee is under a duty to disclose fully and truly material facts necessary for the assessment of the year and even if it be assumed that from the books produced the ITO, if he had been circumspect, could have found out the truth, the ITO is not on that ground precluded from exercising the power to assess income which has escaped assessment. Thus, the mere fact that the agreement dated May 2, 1945, was placed by the assessee-company before the ITO is not enough unless a claim was made before him, on the basis of the contents of Clause 18 of the said agreement, by the assessee-company to the effect that a part of the amount paid by the assessee-company to the State of Rajasthan was paid in lieu of income-tax and other taxes. We are, therefore, of the view that the conditions which empower the ITO to reopen the assessment did exist in the present case as he could have entertained a reasonable belief that material facts necessary for the assessment of income-tax for the years in question were not truly and fully disclosed and there was an escapement of tax in consequence thereof. In Section Narayanappa v. CIT : [1967]63ITR219(SC) Ramaswami J., speaking for their Lordships of the Supreme Court, observed (p. 221):

' The legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any nondisclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under Section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief.'

13. Thus, the court can go into and examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. Once the court comes to the conclusion that the ITO had reasonable grounds for thinking that there was non-disclosure on the part of the assessee-company, which led to non-assessment or underassessment of the income or profits of the assessee, the court cannot proceed further to examine whether the reasons which led the ITO to form the aforesaid opinion were sufficient or adequate. We are of the opinion, for the reasons mentioned above, that in the present case, the ITO had primafacie reasonable ground to believe that the information which was material for the assessment had not been fully or truly disclosed by the assessee-company and that on account of the withholding of that information, the income which was liable to be taxed had escaped assessment to tax. It was the duty of the assessee-company to make a pointed reference to the portion of the document, namely, Clause 18 of the agreement dated May 2, 1945, if it intended to rely upon it in order to make out a case that a portion of the amount paid by the assessee-company under Clause 18 was not royalty proper but was paid by it in lieu of income-tax and other taxes. In ITO v. Sudhir Kumar Bose : [1972]84ITR60(Cal) it was held that the non-disclosure of facts which led to the initiation of the reassessment proceedings need not be wilful or deliberate. But if such non-disclosure of material facts has occurred and on that account income liable to tax undoubtedly escaped assessment, then the ITO may be justified in holding the view that there was reason to believe that income of the assessee had escaped assessment on account of the omission or failure on the part of the assessee to disclose fully or truly the material facts necessary for his assessment for that year. Learned counsel for the assessee-company referred to the decision of the Gujarat High Court in Bhanji Lavji v. C'IT : [1967]63ITR1(Guj) . However, the decision of that case cannot be made applicable to the facts of the present case, as it was held in that case by their Lordships of the Gujarat High Court that not only the fact which was alleged to have not been disclosed was not a material fact at all but their Lorships further proceeded to hold that apart from the question whether a material fact was disclosed or not, no part of the income of the assessee had escaped assessment in consequence of the non-disclosure of that fact. In Bhanji Lavji's case : [1967]63ITR1(Guj) the High Court found that the escapement of income from assessment was occasioned not by reason of nondisclosure of a material fact but on account of the erroneous view taken by the ITO concerned.

14. It may also be pointed out that the burden to disclose facts was primarily on the assessee and any knowledge about the pendency of the suit on the part of the department cannot dispense with the necessity on the part of the assessee to discharge its duty to disclose all primary facts material for its assessment for that year. The assessee-company cannot, therefore, be absolved from its duty to disclose fully or truly all the relevant facts material for the purpose of assessment, merely on the ground that the assessee-company had filed a suit in the Court of the' District Judge, Kotah, against the Union of India and the ITO might have had an opportunity of finding out the facts which the assessee-company disclosed orrelied upon in the plaint in that suit. In TS. PL. P. Chidambaram Chettiar v. CIT : [1966]62ITR774(Mad) it was held that for invoking jurisdiction under Section 34(1)(a) of the 1922 Act and initiating action under the said provision, it is not necessary that omission or failure on the part of the assessee and actual escapement of income from assessment should be found as a condition precedent. It would suffice if the ITO has reason to believe that income has escaped assessment on account of the failure of the assessee to disclose fully and truly all material facts necessary for the assessment for that year. It was also held that the duty to disclose facts is primarily on the assessee. In CIT v. TS. PL. P. Chidambaram Chettiar : [1971]80ITR467(SC) their Lordships of the Supreme Court observed that the assessee had a duty to disclose fully and truly all material facts necessary for his assessment. The mere fact that there was some vague information before the ITO was not sufficient to take the case out of the purview of Section 34(1)(a) of the Act particularly when the assessee has failed to disclose fully and truly all material facts before the ITO. Thus, we are satisfied that the Tribunal was not correct in holding that the assessee-company did not fail to disclose all material relevant or primary facts and the mere production of the lease agreement or some vague awareness on the part of the ITO about the triangular dispute between the assessee, the State of Rajas-than and the Union of India before the District Judge, Kotah, and the service of the interim injunction upon him, cannot lead to an inference that the ITO was aware as a matter of fact that the amount paid by the assessee-company under the. lease agreement consisted not only of royalty proper but also some amount was paid in lieu of income-tax and other tax Section Actually, the assessee-company claimed before the ITO that the entire amount paid by it under the lease agreement was paid by way of royalty and was exempted from payment of income-tax. As mentioned above, it is not the case of the assessee-company that a copy of the plaint filed by it in the Court of the District Judge, Kotah, was produced before the ITO in the original assessment proceedings nor it was urged by the assessee-company before the ITO that income-tax, super-tax and other taxes had already been paid by it to the State Government, as a part of the amount of royalty. How could the ITO become aware of the pleas which might have been taken by the assessee-company, in the alternative, before the District Judge, Kotah, unless the same were brought to the notice of the ITO in the course of the assessment proceedings before him. We, therefore, hold that the reassessment proceedings for the assessment years 1950-51 to 1956-57 were validly taken under Section 34(1)(a) of the 1922 Act and the notices of reassessment under Section 34(1)(a) of the 1922 Act were rightly issued in respect of the assessments relating to the assessment years 1950-51. to1956-57.

Question No. 2

15. In view of our finding in respect of question No. 1, it is no longer necessary for us to decide as to whether the assessments for the assessment years 1954-55 and 1956-57 could be reopened under Section 34(1)(b) of the Act. However, as the learned counsel for the parties have advanced lengthy arguments on merits, we consider it proper to answer this question as well. It is not in dispute that the proceedings for reassessment for the assessment years 1954-55, 1955-56 and 1956-57 were taken within a period of four years from the date of completion of the original assessment proceedings and as such those reassessment proceedings could have been validly made under Section 34(1)(b) of the Act. For the application of the provisions of Section 34(1)(b) of the 1922 Act only this much is necessary that the ITO should have reason to believe, in consequence of information which might have come into his possession, that income chargeable to tax has escaped assessment. It is also not disputable now, as it is the case of the assessee-company itself, that the amount of royalty paid over and above the minimum royalty amount of Rs. 1,50,000 was paid in lieu of income-tax, super-tax and excess profits tax. It is also beyond dispute that the amount which was paid in lieu of taxes could not be claimed as exempt from payment of income-tax. Thus, the amount of royalty paid by the assessee-company, in excess of the minimum royalty, which was alleged to have been paid to the State Govt. in lieu of income-tax and super-tax liability of the assessee-company, was the income of the assessee-company, which was chargeable to tax and which had, as a matter of fact, escaped assessment at the time of the completion of the original assessment. It may be recalled that in the original assessment order, the ITO had allowed the entire amount paid by the assessee-company by way of royalty as an allowable or permissible deduction and that this included not only the royalty proper but also excess royalty which comprised of the amount paid in lieu of taxes as well as of the residue. The argument of the learned counsel for the assessee-company in this respect is that as the notice of reassessment issued by the ITO to reopen the original assessment was given under Section 34(1)(a) of the Act, the reassessment proceedings could not have been treated to be under, Section 34(1)(b) of the 1922 Act.

16. In Kantamani Venkata Narayana and Sons v. First Addl. ITO : [1967]63ITR638(SC) it was held by their Lordships of the Supreme Court that it was neither necessary nor imperative that a notice given under Section 34(1) of the Act should specify as to under which of the clauses, namely, Clause (a) or Clause (b) of Section 34(1), the said notice was issued. The notice which was required to be issued in a case under Section 34 of the 1922 Act was the notice under Section 22(2) of the Act and Section 34 merely authorised the issuance of sucha notice. In Kantamani's case : [1967]63ITR638(SC) the notice issued by the ITO did not set out the clause of Section 34 under which it was issued. In the aforesaid case, their Lordships of the Supreme Court approved the decision of their Lordships of the Calcutta High Court in P.R. Mukherjee v. CIT : [1956]30ITR535(Cal) wherein it was held that the words with which Clause (b) of Section 34(1) opened should be taken as contemplating both a case where there was no actual omission or failure on the part of the assessee to mention all material facts and also the case where there was an omission or failure on the part of the assessee to mention all material facts, but such an omission or failure was not in respect of the facts which were known to the assessee at the time when the return was filed and, therefore, was not deliberate. In Mriganka Mohan Sur v. CIT : [1974]95ITR503(Cal) it was held by a Division Bench of the Calcutta High Court that Clause (a) and (b) of Section 34(1) do not deal with two separate jurisdictions. Although two separate periods of limitation are prescribed in respect of the aforesaid two clauses, yet as some of the conditions are common and in case the conditions which are common are fulfilled and proceedings are initiated within the period of limitation provided under the other clause, then action taken under one clause of Section 34 might be justified with reference to the power vested under the other clause.

17. Learned counsel for the assessee-company placed strong reliance upon the decision of their Lordships of the Supreme Court in Johri Lal v. CIT : [1973]88ITR439(SC) . But that case dealt with an entirely different situation and cannot be made applicable to the case before us. In that case, a notice was issued under Section 34(1)(b) of the Act and it was sought to be justified under the provisions of Clause (a) of Section 34(1) of the Act. It was held by their Lordships of the Supreme Court that the notice issued under Clause (b) of Section 34(1) of the Act could not be treated as one issued under Clause (a) of Section 34(1) of the Act. The reason for this is apparent as Clause (a) requires the formation of a belief by the ITO that there was a failure or omission on the part of the assessee to disclose fully and truly all material facts and there must be some material to form such a belief that the failure or omission on the part of the assessee had led to the escapement or under-assessment of income of the assessee. The formation of such a belief by the ITO is a condition precedent to the initiation of action under Clause (a) of Section 34(1) of the Act and if in any case the ITO has not formed such a belief about the omission or failure on the part of the assessee leading to the escapement of income of the assessee from tax or under-assessment, then no other authority, not even the appellate authority, could be entitled to form that belief. Moreover, there are other limitations prescribed under Clause (a) of Section 34(1) of the Act, namely, that the ITO is bound to record the reasons, which led to the formation ofthat belief and further sanction of the Commissioner or the CBR is also necessary. But these requirements do not find any place in Section 34(1)(b) and are, thus, not necessary for the purposes of taking proceedings for reassessment under Clause (b) of Section 34(1) of the Act. It is common to both the cls. of Section 34(1) that the ITO should form a belief that there was an escapement of income and further such a belief should have been formed upon information coming to his knowledge subsequent to the completion of the original assessment. There is thus nothing to prevent an ITO from taking action under Clause (b) of Section 34(1) of the Act on the basis of notice given under Section 34(1)(a), provided the action is taken within four years from the end of the relevant assessment year. It may be emphasized that Section 34 of the Act is not the charging section, as held by their Lordships of the Supreme Court in Kantamani's case : [1967]63ITR638(SC) because a notice has to be issued under Section 22(2) of the 1922 Act and Section 34 merely authorises issuance of such a notice. If the ITO has chosen to make the assessment under the more stringent and onerous provisions of Section 34(1)(a), then, in our opinion, there was nothing to prevent the appellate court from invoking the provisions of Section 34(1)(b) provided the pre-requisite conditions for the application of Clause (b) are satisfied. A closer examination of the provisions of Clause (a) and (b) of Section 34(1) of the Act indicates that both of them deal with the power of reopening cases of income escaping assessment and making reassessments and although they covered different contingencies and situations, they do not deal with separate jurisdictions. It cannot be said that Clause (a) and (b) of Section 34(1) are mutually exclusive. Although it is true that if action is taken under Clause (b) of Section 34(1) it could not be justified subsequently under Clause (a) of that section for the reasons indicated above. But the reverse is not true and if action is taken under Clause (a) of Section 34(1), then if the other conditions like limitation, prescribed by Clause (b) arc satisfied, such action can lawfully be justified under the provisions of Clause (b) of Section 34(1) of the Act. If the information was not sufficient to lead to the formation of the belief or if there was no such information at all, then there was clearly a failure or omission on the part of the assessee to disclose fully or truly all material facts. But if it is found that there was some information relating to escapement of income or under-assessment of income and if action is taken within four years of the completion of the original assessment, then such action can be justified under Clause (b) of Section 34(1), even if it is purported to have been taken under Clause (a) of Section 34(1) of the Act, Therefore, our answer to question No. 2 is that reassessments of the assessee-company for the years 1954-55, 1955-56 and 1956-57 could be justified under Section 34(1)(b) of the Act.

Question No. 3

18. We have already reproduced above Clause 18 of the lease agreement dated May 2, 1945, and a perusal thereof leads to the conclusion that whatever amount was paid by the assessee-company in pursuance of the aforesaid Clause 18 consisted of two parts only, namely, royalty proper, which was paid in consideration of the concessions and privileges granted by the State for the purposes of mining stones and, secondly, the amount which was paid in lieu of income-tax, super-tax and excess profits tax. It has also been provided in Clause 18 that the minimum amount payable by the assessee, who was the lease-holder, was Rs. 1,50,000 per financial year. But the said amount was liable to be increased on account of the increased production as the calculation was made at the rate of Re. 1 per 100 sq. ft. and which could also be increased if a higher rate became applicable instead of the basic selling rate of unpolished slabs of Rs. 10 per 100 sq. ft. In that case, the royalty was payable after adding 25% of the excess to the rate of Rs. 10 per 100 sq. ft. It is now settled law that the amount paid by way of royalty including the dead rent would be revenue expenditure and would be exempted from payment of income-tax and it would be sufficient to refer to the decision of their Lordships of the Supreme Court in Gotan Lime Syndicate v. CIT : [1966]59ITR718(SC) . In the present case, no amount was paid by way of premium by the assessee-company, which could be referable to the acquisition of the mining rights or for securing an advantage of enduring nature. But the royalty amount has been agreed to be paid in relation to the quantum of the raw material excavated and, therefore, the same is revenue expenditure. However, the amount which is said to have been paid in lieu of income-tax, super-tax and excess profits tax, etc., cannot be said to be exempt from payment of income-tax. The Tribunal adopted the reasoning of the learned District Judge, Bharatpur, in holding that the amount of royalty paid by the assessee-company consisted of three parts, namely, (i) royalty proper, represented by the minimum amount to Rs. 1,50,000 per financial year, (ii) the amount paid in lieu of taxes, viz., income-tax, super-tax and excess profits tax, etc., and (iii) the residue out of the excess royalty. To our mind, a bare reading of Clause 18 of the agreement dated May 2, 1945, leaves no doubt that the royalty amount paid by the assessee-company to the State Govt. consisted of two parts only, namely, the amount paid in consideration of concessions/privileges, which may be termed as royalty proper and the amount paid in lieu of income-tax, super-tax and excess profits tax, which may be termed as the tax component of the total amount of the so-called royalty, paid by the assessee-company to the State Govt. The finding recorded by the Tribunal, adopting the decision of the learned district judge, which has been set aside in appeal by the High Court, tothe effect that only a sum of Rs. 1,50,000 represented royalty proper is based entirely upon a misconception of facts, as pointed out above. Clause 18 of the agreement shows that the amount of royalty was to be calculated at the rate of Re. 1 per 100 sq. ft. of the stones excavated by the lessee, which amount was subject to. be increased on account of the increased production and also on account of the selling rate of unpolished slabs exceeding Rs. 10 per 100 sq. ft. Thus, the total quantum of royalty payable by the assessee in any year depended upon the quantity of stones excavated by the assessee subject to the minimum of Rs. 1,50,000. Thus, if there is anything which is not royalty then it is the tax component, out of the total amount paid by the assessee-company to the State Govt. under the name of royalty. If any amount remained in any year over and above Rs. 1,50,000 per financial year, by way of residue after deducting the tax component therefrom, then such residue would be part of royalty and would, therefore, be revenue expenditure, which is exempt from payment of tax. According to our view, the total amount of royalty paid by the assessee-company to the State Govt. under Clause 18 of the lease agreement merely consisted of two parts and, thus, the amount over and above the minimum royalty of Rs. 1,50,000 which has been referred to as the residue by the Tribunal and which remained after deduction of the tax component out of the excess royalty, would be part of royalty proper and would be an expenditure of revenue nature.

19. We may also refer in this connection to the decision of their Lordships of the Supreme Court in the case of the assessee-company, pertaining to the assessment years 1948-49 and 1949-50 in Associated Stone Industries (Kotah) Ltd. v. CIT : [1971]82ITR896(SC) wherein the amount paid as royalty was considered to be consisting of two parts only, namely, royalty proper and excess profits tax. It was held by their Lordships of the Supreme Court that the amount was payable under the terms of a contract, although the reason mentioned for that payment in the lease agreement was erroneous, as no income-tax, super-tax and excess profits tax was chargeable during the assessment years 1948-49 and 1949-50 in the then State of Kotah. Thus, besides the amount, which was said to have been paid in lieu of taxes, the remaining amount, out of the excess royalty or what is called by the Tribunal in the present case as ' the residue ' is of the same nature as the minimum royalty, because the nature of that payment is not in any manner different from that of the minimum royalty paid by the assessee-company and was a permissible deduction, allowable under Section 10(2)(xv) of the Act. It was also observed by their Lordships of the Supreme Court in the aforesaid case that such payment was not made for getting some additional capital asset or even for obtaining any benefit of an enduring nature, but it was paid on the basisof commercial expediency. We, therefore, hold that the so-called residue, which remained out of the excess royalty after the exclusion of the tax component therefrom was in the nature of revenue expenditure and the assessee-company was not liable to payment of tax on such amount.

Question No. 4

20. This question is based upon the provision of Clause 19 of the agreement dated May 2, 1945, which runs as under :

' 19. In addition to the royalty mentioned in Clause 18, the GRANTEE have expressly covenanted to pay royalty on polished stone at the rate of Re. 1 per 100 sq. ft. payable every quarter.'

21. The amount which was paid by the assessee-company in pursuance of Clause 19 in respect of the polished stone was not royalty as is clear from the opening words of Clause 19, but it was the amount, which was payable by the lessee in addition to the royalty, on the production of polished stones. The decision of their Lordships of the Supreme Court in Gotan Lime Syndicate's case : [1966]59ITR718(SC) is also applicable to the so-called royalty payable on polished stone under Clause 19 of the agreement and the same is, therefore, a permissible deduction. We have no hesitation in concurring with the findings of the Tribunal on this question.

Question No. 5

22. So far as the question of charging of penal interest under Section 18A of the Act is concerned, the Tribunal came to the conclusion that the assessee-company was entitled to file an appeal in that matter. The Tribunal took the view that the amount of interest determined under Section 18A(8) of the Act was 'tax' within the meaning of the Act and the assessee-company would have a right to file an appeal to the AAC against an order passed under Section 18A of the Act, which provides that on making a regular assessment, if the ITO finds that no payment of tax has been made by the assessee in accordance with the provisions of the Act, then interest may be calculated in the manner laid down in Sub-section (6) of Section 18 of the Act and the same shall be added to the tax as determined on the basis of the regular assessment. Section 30 of the Act provides for filing of appeals and no appeal is specifically provided in respect of an order passed under Sub-section (8) of Section 18A of the Act, yet the Tribunal held that an appeal shall lie under Section 30 of the Act because any assessee ' denying his liability to be assessed under the Act ' is entitled to file an appeal under Section 30 of the Act to the AAC.

23. There has been a sharp divergence of judicial opinion on this question in the Bombay High Court. In CIT v. Jagdish Prasad Ramnath : [1955]27ITR192(Bom) and Keshardeo Shrinivas Morarka. v. CIT : [1963]48ITR404(Bom) the Bombay High Court took the view that since Section 30 of the Indian I.T. Act, 1922, did not specifically provide for an appeal against the levy of penalinterest under Section 18A(8) of the Act, an appeal was not maintainable againstthe levy of penal interest. It was observed in those cases that if the Legislature intended to provide a right of appeal against an order imposingpenalty, the same would have been specifically provided for in Section 30 of theAct and the absence of a specific provision giving a right of appeal againstan order imposing penal interest under Section 18A(8) of the Act clearlyindicated that no right of appeal was intended to be given against such anorder under Section 30 of the Act. However, in a subsequent decision inMathuradas B. Mohta v. CIT : [1965]56ITR269(Bom) another Division Bench ofthe Bombay High Court took a different view and held that the levy ofpenal interest under Section 18A amounts to levy of tax under the Act. Theamount of penalty was tax within the meaning of the Act and as theassessee was ' denying his liability ' to pay the tax, which is designatedas interest under Section 18A(8) of the Act, he had a right to file an appeal underSection 30 of the Act. In the last mentioned case, reliance was placed on twodecisions of their Lordships of the Supreme Court in C. A. Abraham v. ITO : [1961]41ITR425(SC) and CIT v. Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) for coming to the conclusion that whatever addition by way of penalty wasmade in the amount of tax, by reason of the provisions of the Act, was tax.It was also observed that since under Sub-section (8) of Section 18A of the Act, theamount of interest determined in accordance with the provisions of Sub-section (6) of Section 18A of the Act was liable to be ' added to the tax as determinedon the basis of the regular assessment '. It was clear that the amount ofinterest determined under Sub-section (8) of Section 18A of the Act was in the natureof an addition to tax. The earlier decision of that court in the case ofJagdish Prasad Ramnath : [1955]27ITR192(Bom) was distinguished on theground that the two decisions of their Lordships of the Supreme Court inAbraham's case : [1961]41ITR425(SC) and Bhikaji Dadabhai's case : [1961]42ITR123(SC) were not then available and the court had proceeded on thebasis that there was a clear distinction between tax and penalty or penalinterest and the assessee, who merely denied his liability to pay the penaltyor penal interest could not be said to deny his liability to be assessed underthe Act, within the meaning of Section 30 of the Act. However, as laid down bytheir Lordships of the Supreme Court in the two cases referred to above,there was no material distinction between tax and penalty, as whateveraddition by way of penalty was made in the amount of tax, by reason ofthe provisions of the Act, which formed part of the machinery relating tothe imposition of tax liability, was tax. Thus, there were apparently conflicting decisions of the Bombay High Court on the subject. However, theconflict was resolved by a Full Bench of the Bombay High Court whichtried to adopt a middle course. Tulzapurkar, Acting Chief Justice, as hethen was, of the Bombay High Court, speaking for the Full Bench observed that under Section 30(1) of the Act an appeal would He to the AAC, if the assessee denies his liability to be assessed under the Act. If the ITO holds that the assessee was under a legal liability to pay advance tax, but the assessee disputed his liability to pay advance tax, and consequently penal interest was charged on him, either under Section 18A(6) or Section 18A(8) of the Act, then it would be a clear case of the assessee ' denying his liability to be assessed under this Act', and the appeal was competent under Section 30(1) of the Act. It was observed that in such a case, it would be unfair to deny the assessee a right of appeal as the assessee would in substance deny his liability to be assessed under the Act. However, a distinction was drawn by Tulzapurkar J., as he then was, in respect of cases where penal interest charged against the assessee either under Section 18A(6) or under Section 18A(8) of the Act for some default on his part and the assessee merely challenged the quantum of penal interest charged on him. It was held that in such a case there could be no right of appeal, inasmuch as, in that event, the assessee would not fall within the expression ' denying his liability to be assessed under this Act ' contained in Section 30(1) of the Act. Thus, in substance, it was held by the Bombay High Court in Daimler-Benz's case : [1977]108ITR961(Bom) that if the assessee raised the basic issue that he was not liable to be assessed to advance tax, under Section 18 A of the Act, then he is competent to file an appeal to the AAC, since he was denying his liability to be assessed to tax under the Act, within the meaning of Section 30 of the Act, but not otherwise when merely the penal interest imposed under Section 18A(6) or Section 18A(8) was sought to be challenged.

24. It may also be mentioned here that the Allahabad High Court in Pt. Deo Sharma v. CIT : [1953]23ITR226(All) the Andhra Pradesh High Court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) and the Madras High Court in South India Flour Mills Ltd. v. CBDT : [1968]70ITR863(Mad) also took the same view as was taken in the earlier Bombay cases that in the absence of a specific provision under Section 30 of the Act, no appeal would lie to the AAC against the order relating to the imposition of penal interest under Section 18A(6) of the Act. These cases, however, were dissented from by the Bombay High Court in Daimler's case : [1977]108ITR961(Bom) . The Karnataka High Court in National Products v. CIT : [1977]108ITR935(KAR) considered the provisions of the I.T. Act, 1961, and held that the levy of interest under Section 215 of the I.T. Act, 1961, was not appealable although in an appeal against an order of regular assessment it was open to the assessee to take every contention, including the liability to pay advance tax and the absence of liability to pay penal interest. However, so far as the provisions of the Indian I.T. Act, 1922 were concerned, the following observations (at p. 942) were made by the Karnataka High Court in respect ofthe decision of the Bombay High Court in Mathuradas B. Mohta's case : [1965]56ITR269(Bom)

'If penal interest levied under Section 18A(6) or Section 18A(8) could be regarded as 'tax' within the meaning of the 1922 Act, there was no need to rely on the clause ' an assessee...denying his liability to be assessed under this Act' occurring in Section 30, since the said section conferred a right of appeal where the assessee objected to the amount of tax. The ratio of the decision rests on the view that penal interest levied under Section 18A was in addition to the tax and that addition to the tax had been made by reason of the provisions of the section which formed part of the general machinery for assessment of tax liability created by the Income-tax Act.'

25. It was also observed that the levy of penal interest under Sections 139 and 215 of the I.T. Act, 1961, was part of the assessment of tax and if the assessee denied his liability to be assessed, then he had a right of appeal against the order of assessment.

26. We may also refer to two other decisions of the Allahabad High Court in Ram Chand and Sons Sugar Mills (P.) Ltd. v. CIT : [1977]107ITR539(All) and Vidyapat Singhania v. CIT : [1977]107ITR533(All) wherein the earlier view taken by the Bombay High Court in Keshardeo Shrinivas Morarka's case : [1963]48ITR404(Bom) was followed in preference to the subsequent view of that court in Mathuradas B. Mohta's case : [1965]56ITR269(Bom) and, thus, the earlier view taken by that court in Pt. Deo Sharma's case : [1953]23ITR226(All) was adhered to.

27. We may also refer to two more decisions so as to bring out the conflict of decisions on the subject. In CIT v. Sharma Construction Co. : [1975]100ITR603(Guj) the Gujarat High Court dealt with the provisions of the I.T. Act, 1961, and held that Section 246 of the I.T. Act, 1961, provides for an appeal against different orders enumerated therein and since there is no mention in Section 246 of an order charging interest under Section 139 or charging penal interest under Section 215 of the new Act, no appeal would lie against such order to the AAC. The same view was taken by the Gauhati High Court in K. B. Stores v. C/r .

28. It is well settled that the right of appeal is a creature of statute and unless an appeal is provided for specifically or by necessary intendment, such a right cannot be availed of by any party. As there is no specific provision in Section 30 of the Act, giving a right of appeal in respect of an order imposing penal interest, under Sections 18A(6) or 18A(8) of the Act of 1922, no appeal would be maintainable against the penal interest charged if the same is claimed to be excessive or erroneously imposed. However, if the assessee denied his liability to be assessed in respect of advance tax and thereby denied altogether his liability to pay tax then in an appeal filedagainst the order of assessment, the assessee could also challenge the imposition of penal interest because in that event the assessee would be ' denying his liability to be assessed under this Act', occurring in Section 30 of the Act.

29. In substance penal interest calculated and charged under Sub-section (6) or Sub-section (8) of Section 18A could only be challenged in an appeal filed against the order of assessment to tax and the assessee would be entitled to deny his liability to payment of penal interest also while denying his liability to be assessed to tax under Section 18A of the Act. We, therefore, find ourselves in agreement with the Allahabad, Andhra Pradesh, Madras, Karnataka, Gujarat and Gauhati High Courts and the decision of the Bombay High Court in Keshardeo Shrinivas Morarka's case : [1963]48ITR404(Bom) on the aforesaid question.

Question No. 6

30. It was then argued by the learned counsel for the assessee that the amount out of royalty which was held to be receivable by the Union of India in lieu of income-tax and super-tax, should be treated as payment by the assessee-company towards its income-tax liability and the balance amount of tax, if any, payable by the assessee-company should be determined. The Union of India was entitled to receive the amount of income-tax and super-tax liability from the assessee-company and if any payment would have been made by the assessee-company to the Union of India towards its tax liability, the same could have been adjusted towards income-tax and super-tax liability of the assessee-company. But as a matter of fact no amount was paid by the assessee-company to the Union of India towards its tax liability and if any amount was paid by the assessee-company by way of excess royalty to the State Government of Rajasthan, the same could not be held to have been paid to the Union of India, in lieu of its tax liability by the assessee-company. The Tribunal was apparently in error in holding that the assessee-company was entitled to obtain a credit for that portion of the royalty which was said to have been paid by it to the State Govt., in lieu of income-tax and super-tax liability of the assessee-company, because of the simple reason that admittedly no amount was at all paid to the Union of India by the assessee-company or by any person on its behalf, which could have been credited towards the tax liability of the assessee-company under the I.T. Act. The Tribunal was clearly in error in directing the ITO to give credit to the assessee-company for the amount of excess royalty which was paid to the State Govt. by the assessee-company. Merely because the District Judge, Kotah, observed that the Union of India was entitled to that amount which was paid by the assessee-company to the State Govt. by way of excess royalty on the ground that it was paid in lieu of theincome-tax and super-tax liability of the assessee-company, that could not entitle the assessee-company to any credit of such amount from the tax liability of the assessee-company to the Union of India. How could that amount paid by the assessee-company to the State Government of Rajas- than by way of excess royalty, though paid in lieu of tax liability, be treated as payment by the assessee-company to the Union of India towards its tax liability or adjusted towards such tax liability ?

31. In our view, the Tribunal clearly misdirected itself in law in this respect as the State Govt. had not received the amount of excess royalty from the assessee-company as an agent of the Union of India or on behalf of the Union of India, but the said amount was paid by the assessee-company in pursuance of the terms of the lease agreement between the assessee-company and the State Govt. Even if the State Govt. may not have been entitled to receive the amount, which according to the learned district judge, was payable to the Union of India on account of the liability of the assessee-company under the Indian I.T. Act, 1922, yet when the assessee-company failed to make any payment in respect of its tax liability to the Union of India, it cannot obtain any credit on that account of any amount which might have been paid by it to the State of Rajasthan by way of excess royalty. The tax was to be paid by the assessee to the Union of India under the 1922 Act, and unless and until the amount of tax is received by the Union of India, the tax liability of the assessee-company could not be adjusted by giving credit to it for any amount which might have been paid by it to the State Govt., even if the said amount was paid to the State Govt. in lieu of the tax liability by the assessee-company. As a matter of fact, as we have already observed above, the amount was paid by the assessee-company by way of excess royalty, in pursuance of the agreement between the assessee-company and the State Govt., to which the Union of India was not a party, and the tax liability of the assessee-company under the 1922 Act could not be wiped off because certain amounts were paid by the assessee-company to the State Govt., which the State Govt. may or may not be entitled to receive. Such amount cannot be deemed to have been paid to the Union of India in respect of the tax liability of the assessee-company.

32. We, therefore, answer the question in the negative and hold that the assessee-company was not entitled to get credit for any amount of the excess royalty, said to have been paid by the assessee-company to the State Govt.

Question No. 7

33. This leads us to the last question as to whether the amount of the residue, in excess of Rs. 1,50,000 paid to the State Govt. by the assessee-company by way of royalty under Clause 18 of the lease agreement dated May 2, 1945, is a permissible deduction in the assessment years 1957-58 to 1960-61.

34. The Tribunal was of the view that the amount equal to the tax liability of the assessee-company for the relevant years, out of the excess royalty, was not a permissible deduction. According to the Tribunal, out of the excess royalty, the portion equal to the tax liability for the same year, may not be held to be a permissible deduction. But the remaining portion or residue out of the excess royalty would partake of the same character as the minimum royalty of Rs. 1,50,000 and should be held to be a permissible deduction. The Tribunal also held that the State Govt. was entitled to the residue out of the excess royalty over and above the tax liability of the assessee-company and on that basis it was held that the residue out of the excess royalty was a permissible deduction. As the amount of royalty paid by the assessee-company to the State Govt. in excess of the sum of Rs. 1,50,000 was an expenditure of revenue nature and the same is permissible deduction on the basis of the principles laid down by their Lordships of the Supreme Court in Gotan Lime Syndicate v. CIT : [1966]59ITR718(SC) and the amount of the royalty paid, even in excess of the minimum royalty of Rs. 1,50,000 under Clause 18 of the lease agreement is a permissible deduction. However, the amount said to have been paid in lieu of income-tax, super-tax, etc., being not expenditure of a revenue nature cannot be held to be a permissible deduction in the relevant assessment years, although the same formed part of royalty paid under Clause 18 of the lease agreement. We answer the question accordingly.

35. In the circumstances of the case, the parties are left to bear their own costs.


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