2023 (9) TMI 1117 - AT - Income Tax

Disallowance of royalty u/sec. 43B - violation of Rule 46A by the ld. CIT(A) while providing relief to the assessee - HELD THAT - As on the merits of the addition u/sec. 43B, the law laid down specifically by the decision of State of West Bengal v. Kesoram Industries Ltd. 2004 (1) TMI 71 - SUPREME COURT is that royalty is not tax. Further, the Hon'ble Gujarat High Court in the case of CIT v. Kutch Minerals 2008 (1) TMI 1001 - GUJARAT HIGH COURT has held that royalty is not tax and hence the provisions of sec.43B would not be attracted. When the merits of addition under the said provision is not sustainable, then in such scenario, the issue whether there has been any violation of Rule 46A by the ld. CIT(A) while providing relief to the assessee on this very section itself becomes redundant and infructuous. DR also could not refute the said proposition of law as laid down by the Hon'ble Supreme Court (supra) by citing any decision favouring the Revenue. Accordingly, there is no infirmity in the order of the ld. CIT(A) on this issue and it is upheld. Hence, ground No.1 of the Revenue s appeal is dismissed. Suppression of sale - Assessee has resorted to manipulation of sales price of iron ore sold to its sister concerns to evade payment of Royalty - HELD THAT - Hon'ble Supreme Court in the case of CIT v. Calcutta Discount Company Ltd. 1973 (4) TMI 6 - SUPREME COURT held that when one trader transfers his goods to another trader at a price less than the market price, the taxing authority cannot take into account the market price of those goods ignoring the real price fetched. In this case of the assessee, the AO has not alleged that the assessee has not offered its income for purposes of taxation in the return of income. AO also has not doubted the transaction as such. It is also not the case of the AO that the assessee has earned more than it has offered to tax merely because the sale to sister concern is at a price lower than the sale price charged by the sister concern. It is clear that what has to be considered for taxation, is not the market price of the goods which were transferred but the actual price that was received or fetched. Income which actually accrues is taxable. But income which the assessee could have but has not in fact earned cannot be taxed. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of royalty under Section 43B of the Income Tax Act.
2. Suppression of sale value and under-invoicing.
3. Disallowance of conversion charges under Section 37(1) of the Income Tax Act.

Issue 1: Disallowance of Royalty under Section 43B of the Income Tax Act

The Department was aggrieved by the CIT(A)'s deletion of the addition made by the AO through disallowance of royalty under Section 43B for Rs. 5,58,17,298/-. The AO found that the royalty debited to the P&L account had not been paid before the due date for filing the return and was shown as a liability. The CIT(A) observed that the royalty debited to the P&L account had been paid before filing the return, and thus, no disallowance could be made under Section 43B. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Kesoram Industries Ltd. that royalty is not tax, and the Gujarat High Court's decision in Kutch Minerals that royalty is not covered under Section 43B. Therefore, the Department's appeal on this issue was dismissed.

Issue 2: Suppression of Sale Value and Under-Invoicing

The AO alleged manipulation of sales prices to sister concerns, resulting in suppression of sale value amounting to Rs. 105,77,75,066/-. The CIT(A) found that the AO's comparison of sale prices was flawed, as the prices were for different stages (mine head vs. loaded on barges). The CIT(A) deleted the addition, noting that the transactions were at arm's length and the associate concerns incurred costs for loading the ore. The Tribunal upheld the CIT(A)'s findings, citing the Supreme Court's decision in Calcutta Discount Company Ltd. that only the actual price received, not the market price, should be considered for taxation. Consequently, the Department's appeal on this issue was dismissed.

Issue 3: Disallowance of Conversion Charges under Section 37(1) of the Income Tax Act

The assessee had paid conversion charges for using agricultural land for non-agricultural purposes. The AO disallowed these charges, considering them as payments for violating land use laws. The CIT(A) upheld the AO's decision. However, the Tribunal found that the conversion was done as per a government policy and did not result in acquiring any capital asset. Citing the Supreme Court's decision in Bikaner Gypsums Ltd., the Tribunal held that the expenses were for removing restrictions and were on revenue account. Therefore, the Tribunal set aside the CIT(A)'s order and allowed the assessee's appeal.

Conclusion:

In the combined result, the appeals of the Revenue were dismissed, and the appeal of the assessee was allowed. The order was pronounced in open Court on 21st September, 2023.