1991 (4) TMI 89 - HC - Income Tax

Summary

Issues:
1. Interpretation of royalty deduction based on government sanction for assessment years 1964-65, 1965-66, and 1966-67.
2. Treatment of the difference in royalty liability for the assessment year 1967-68 under section 41(1) of the Income-tax Act.

Detailed Analysis:

1. The judgment pertains to the interpretation of royalty deduction concerning the assessee's assessments for the years 1964-65, 1965-66, and 1966-67. The issue revolves around the discrepancy between the agreed royalty rate of 4 1/2 pence per pound and the government-sanctioned rate of 1 1/2 pence per pound. The Income-tax Officer initially allowed the deduction based on the agreed rate, leading to a dispute. The court ruled that for the years 1964-65 and 1965-66, the deduction should be based on the government-sanctioned rate of 1 1/2 pence per pound, as the government's approval was received during those years. However, for the year 1966-67, the deduction should be as per the agreed rate of 4 1/2 pence per pound, favoring the assessee's position.

2. The second issue addresses the treatment of the difference in royalty liability for the assessment year 1967-68 under section 41(1) of the Income-tax Act. The court examined the circumstances surrounding the liability remission in the calendar year 1966, relevant to the assessment year 1967-68. The directors' report indicated that both parties had agreed to reconcile the royalty payment at the rate of 1 1/2 pence per pound in 1966, even though the formal contract was executed later. The court concluded that the liability written off by the assessee with the foreign company's consent should be treated as income under section 41(1) of the Act for years other than 1966-67, supporting the department's position.

In summary, the judgment clarifies the royalty deduction basis, emphasizing government sanction, and addresses the treatment of royalty liability differences for the assessment year 1967-68, highlighting the importance of contractual agreements and consent in determining taxable income.