1997 (2) TMI 6 - SC - Income Tax

Whether the reassessments for the years 1950-51 to 1956-57, were validly made u/s 34(1)(a) - Whether the Revenue was entitled to contend that reassessments for the years 1954-55, 1955-56 and 1956-57 were validly made u/s 34(1)(b) -Whether an appeal can lie against an order levying penal interest u/s 18A - Whether the assessee-company was entitled to a credit of the amount of excess royalty paid which is held to be in lieu of the income-tax and super-tax liability of the company

Issues Involved:
1. Legality of reassessments for the years 1950-51 to 1956-57 under section 34(1)(a) of the Indian Income-tax Act, 1922.
2. Validity of reassessments for the years 1954-55, 1955-56, and 1956-57 under section 34(1)(b) of the Act.
3. Appealability of an order levying penal interest under section 18A of the Act for the assessment years 1957-58 to 1961-62.
4. Entitlement of the assessee-company to a credit of the amount of excess royalty paid in lieu of income-tax and super-tax liability.
5. Permissibility of deduction for royalty payments exceeding Rs. 1,50,000 under clause 18 of the lease agreement for the assessment years 1957-58 to 1960-61.

Issue-wise Detailed Analysis:

1. Legality of Reassessments for the Years 1950-51 to 1956-57 under Section 34(1)(a):
The Supreme Court examined whether the reassessments for the years 1950-51 to 1956-57 were validly made under section 34(1)(a) of the Indian Income-tax Act, 1922. The Tribunal had found that the primary fact, the lease agreement, was disclosed to the Income-tax Officer, who was aware of the triangular dispute and the interim injunction. Therefore, the Tribunal concluded that there was no failure on the part of the assessee to disclose material facts. The High Court, however, held that the Income-tax Officer was not aware of the specific details of clause 18 of the lease agreement, leading to the conclusion that there was an omission by the assessee. The Supreme Court disagreed with the High Court, stating that the primary fact (the lease agreement) was disclosed, and it was not the duty of the assessee to draw specific inferences for the Income-tax Officer. Thus, the Supreme Court held that the reassessment proceedings under section 34(1)(a) were invalid.

2. Validity of Reassessments for the Years 1954-55, 1955-56, and 1956-57 under Section 34(1)(b):
The High Court had justified the reassessments for the years 1954-55, 1955-56, and 1956-57 under section 34(1)(b), despite being initiated under section 34(1)(a). The Supreme Court upheld this view, stating that section 34(1)(a) and 34(1)(b) cover different situations but do not deal with separate jurisdictions. The Court noted that if the conditions for applicability of section 34(1)(b) are satisfied, the reassessment could be justified under this section even if initiated under section 34(1)(a). The Supreme Court found that the information obtained from the assessment records was sufficient to justify the reassessments under section 34(1)(b).

3. Appealability of an Order Levying Penal Interest under Section 18A:
The High Court had held that penal interest calculated and charged under section 18A(6) or 18A(8) can be challenged in an appeal against the order of assessment, but no separate appeal lies against the order levying penal interest. The Supreme Court agreed with this view, citing precedents from various High Courts. However, the Supreme Court remitted the matter to the High Court to ascertain the factual situation and pass appropriate orders regarding the levy of penal interest.

4. Entitlement to Credit of Excess Royalty Paid:
The High Court had held that the excess royalty paid to the State Government could not be deemed to have been paid to the Union of India and that the assessee was not entitled to credit for any amount of the excess royalty. The Supreme Court noted that the High Court had not considered certain vital materials, including a decree by the District Judge, Kotah, which indicated that the excess royalty was paid towards the tax liability of the assessee-company. The Supreme Court remitted the matter to the High Court to reconsider the issue in light of these materials.

5. Permissibility of Deduction for Excess Royalty Payments:
The High Court had held that the amount equal to the tax liability of the appellant-company out of the excess royalty was not a permissible deduction, while the remaining portion was a permissible deduction. The Supreme Court found that the High Court had not considered certain aspects, including the effect of a decree by the District Judge, Kotah, and the earlier decision of the Supreme Court inter-parties. The matter was remitted to the High Court for fresh consideration.

Conclusion:
The Supreme Court set aside the High Court's findings on the validity of reassessments under section 34(1)(a) and upheld the reassessments under section 34(1)(b) for the years 1954-55, 1955-56, and 1956-57. The issue of penal interest was remitted to the High Court for further consideration. The entitlement to credit for excess royalty and the permissibility of deduction for excess royalty payments were also remitted to the High Court for fresh consideration.

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