1979 (7) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Validity of reassessments under section 34(1)(a) of the Indian Income-tax Act, 1922.
2. Entitlement of revenue to contend reassessments under section 34(1)(b).
3. Permissibility of deduction of the residue out of the excess royalty.
4. Permissibility of deduction of royalty paid on polished stones.
5. Appealability of orders levying penal interest under section 18A.
6. Entitlement of the assessee-company to credit for excess royalty paid in lieu of income-tax and super-tax.
7. Permissibility of deduction of royalty in excess of Rs. 1,50,000 under clause 18 of the lease agreement.

Issue-wise Detailed Analysis:

1. Validity of Reassessments under Section 34(1)(a):
The court held that the reassessment proceedings for the assessment years 1950-51 to 1956-57 were validly initiated under section 34(1)(a) of the Indian Income-tax Act, 1922. The court emphasized that two conditions must be satisfied for the ITO to issue a notice under section 34(1)(a): (i) the ITO must have reason to believe that income has escaped assessment, and (ii) such non-assessment must be due to the omission or failure of the assessee to disclose fully and truly all material facts. The court found that the assessee-company did not disclose that part of the royalty paid was in lieu of income-tax and other taxes, thus justifying the reassessment.

2. Entitlement of Revenue to Contend Reassessments under Section 34(1)(b):
The court held that reassessments for the years 1954-55, 1955-56, and 1956-57 could be justified under section 34(1)(b) of the Act. It was noted that the reassessment proceedings were initiated within four years from the date of the original assessments. The court clarified that for section 34(1)(b) to apply, the ITO must have reason to believe, based on information received, that income chargeable to tax has escaped assessment. The court concluded that the reassessments could be justified under section 34(1)(b) even if the notice was issued under section 34(1)(a).

3. Permissibility of Deduction of the Residue out of the Excess Royalty:
The court found that the royalty amount paid by the assessee-company consisted of two parts: royalty proper and the amount paid in lieu of income-tax, super-tax, and excess profits tax. The court held that the residue out of the excess royalty, after excluding the tax component, was part of the royalty proper and thus an expenditure of revenue nature, which is a permissible deduction.

4. Permissibility of Deduction of Royalty Paid on Polished Stones:
The court concurred with the Tribunal's finding that the royalty paid on polished stones, as per clause 19 of the lease agreement, was a permissible deduction. The court applied the principles laid down by the Supreme Court in Gotan Lime Syndicate v. CIT, which considered such payments as part of the cost of the stones and thus revenue expenditure.

5. Appealability of Orders Levying Penal Interest under Section 18A:
The court held that no specific provision in section 30 of the Act provides for an appeal against the levy of penal interest under section 18A. However, if the assessee denies liability to be assessed to advance tax under section 18A, then an appeal could be filed against the order of assessment, including the penal interest. The court agreed with the view that penal interest could only be challenged in an appeal against the assessment order.

6. Entitlement of the Assessee-Company to Credit for Excess Royalty Paid in Lieu of Income-Tax and Super-Tax:
The court held that the assessee-company was not entitled to credit for the amount of excess royalty paid to the State Government in lieu of income-tax and super-tax liability. The court reasoned that no amount was paid to the Union of India towards the tax liability of the assessee-company. The Tribunal's direction to give credit for such amounts was erroneous as the payments were made to the State Government, not the Union of India.

7. Permissibility of Deduction of Royalty in Excess of Rs. 1,50,000 under Clause 18:
The court held that the amount of royalty paid by the assessee-company to the State Government in excess of Rs. 1,50,000 was an expenditure of revenue nature and a permissible deduction. However, the portion of the royalty paid in lieu of income-tax, super-tax, etc., was not a permissible deduction. The court concluded that the residue out of the excess royalty, after excluding the tax component, was a permissible deduction.

Conclusion:
The court provided a detailed analysis of each issue, affirming the validity of reassessments under section 34(1)(a), allowing reassessments under section 34(1)(b), and clarifying the permissibility of deductions related to royalties and penal interest. The court emphasized the importance of full and true disclosure by the assessee and the proper application of statutory provisions in reassessment and deduction claims.