1986 (4) TMI 11 - HC - Income Tax

Summary

Issues Involved:
1. Whether the royalty paid by the assessee to foreign collaborators contains any element of capital nature.
2. Whether the amount representing sales tax could be treated as assessee's income under the mercantile system of accounting.
3. Whether the Tribunal was justified in bifurcating the expenditure of royalty into revenue and capital expenditure.
4. Whether the assessee could withdraw the claim of extra shift allowance before the Income-tax Officer.

Summary:

Issue 1: Nature of Royalty Payment (Assessee's Question and Revenue's Question 2)
The core question was whether the royalty of Rs. 3,09,991 paid by the assessee contained any element of capital nature. The Tribunal had bifurcated the royalty payment into 2/3rds revenue expenditure and 1/3rd capital expenditure. The court held that the entire sum paid as royalty was revenue expenditure. The court reasoned that the payments were made for profit-earning activities and did not result in an enduring benefit to the assessee. The court also found no basis for the bifurcation by the Tribunal. Thus, the entire sum of Rs. 3,09,991 was allowable as revenue expenditure.

Issue 2: Sales Tax as Income (Revenue's Question 1)
The question was whether the amount of Rs. 80,688 representing sales tax could be treated as the assessee's income in the assessment year in question. The court held that since the assessee follows the mercantile system of accounting and did not deposit the sales tax sums in the Government treasury during the relevant year, it must be deemed to be the income of the assessee. This view was supported by the Supreme Court's decision in Sinclair Murray and Co. P. Ltd. v. CIT and the court's own decision in CIT v. Motipur Sugar Factory (P.) Ltd.

Issue 3: Withdrawal of Extra Shift Allowance Claim (Revenue's Question 3)
The court addressed whether the assessee could withdraw the claim of extra shift allowance before the Income-tax Officer. The assessee, through its counsel Mr. Dinesh Vyas, conceded that it did not intend to contest the matter and accepted the correctness of the Income-tax Officer's order. The court, therefore, refused to answer this question and directed that the order of the Income-tax Officer should be considered effective.

Conclusion:
1. The royalty payment of Rs. 3,09,991 was entirely revenue expenditure and allowable as such.
2. The amount of Rs. 80,688 representing sales tax was deemed to be the income of the assessee.
3. The Tribunal's bifurcation of the royalty expenditure was not justified.
4. The assessee's concession regarding the extra shift allowance was accepted, and the court refused to answer this question.

The references were thus disposed of, with no order as to costs.