2006 (8) TMI 107 - HC - Income Tax

In the present case, though the liability to pay the royalty was in elation to 1981-82 and 1982-83, the liability to pay royalty was finalized on Jan 2, 85 so section 43B would apply with full force Hence royalty is deductible by way of tax in assessment year 1985-86

Summary

Issues:
Interpretation of Section 43-B of the Income Tax Act regarding the deductibility of royalty payment for assessment year 1985-86.

Analysis:
The primary issue in this case revolves around the interpretation of Section 43-B of the Income Tax Act concerning the deductibility of royalty payment for assessment year 1985-86. The Income-tax Appellate Tribunal, Ahmedabad Bench "B" referred the matter to the High Court to determine whether the additional liability of Rs.2,71,855 on account of royalty pertaining to assessment years 1981-82 and 1982-83 was an allowable deduction in assessment year 1985-86. The crux of the matter lies in whether the liability created or arose in the accounting period pertaining to the said Assessment Year.

The Income-tax Officer initially disallowed the payment of royalty, stating that the assessee could not benefit from Section 43-B as the liability did not pertain to the assessment year 1985-86 but to the preceding years. However, the Appellate Tribunal found that the amounts were paid within the statutory permissible time following the end of the Accounting Year, thus applying Section 43-B to the case. The Tribunal emphasized that the actual payment was made in the assessment year 1985-86, and the liability was finalized in January 1985.

The crux of the legal argument presented by the Revenue's Counsel was that Section 43-B should not apply since the liability was related to assessment years 1981-82 and 1982-83, not 1985-86. However, the Tribunal's order clarified that the disputed royalty payment indeed related to the earlier assessment years, and the matter was resolved by the State Government in January 1985, necessitating payment in the 1985-86 assessment year.

Section 43-B of the Income Tax Act stipulates that a deduction for any sum payable by an assessee shall be allowed only in the previous year in which such sum is actually paid. In this case, even though the liability for royalty payment dated back to the earlier assessment years, its finalization in January 1985 meant that Section 43-B applied if the payment was made in the 1985-86 assessment year. The judgment referenced the case law of CIT v. Nagri Mills Co. Ltd., highlighting the importance of allowing permissible deductions without unnecessary disputes over the timing of such deductions.

In conclusion, the High Court held that the authorities were justified in allowing the deduction for the assessment year 1985-86 based on the application of Section 43-B and the finalization of the liability in January 1985. The judgment was delivered against the interest of the Revenue, disposing of the reference accordingly and without costs.