1971 (8) TMI 27 - SC - Income Tax

Whether the payment of royalty in excess of the aforesaid minimum is deductible under section 10 - answer is in favour of the assessee

Summary

Issues:
Assessment of the assessee as a non-resident for the years 1948-49 and 1949-50.
Deductibility of excess royalty paid under section 10 of the Indian Income-tax Act, 1922.

Analysis:
The judgment delivered by the Supreme Court pertains to an appeal arising from the decision of the High Court of Delhi regarding the assessment of the assessee-appellant for the years 1948-49 and 1949-50 as a non-resident. The controversy revolved around the deductibility of excess royalty paid by the assessee. The company, incorporated in 1945, was granted a monopoly for excavating stone slabs in a specific region by the Maharaja of Kotah. The agreement between the Maharaja and the assessee included clauses specifying the royalty payments for excavated and polished stones. The Appellate Assistant Commissioner and the Tribunal differed in their conclusions regarding the deductibility of excess royalty under section 10(2)(xv) and section 10(4) of the Act. The Tribunal submitted a question to the High Court under section 66(1) seeking clarification on the deductibility of excess royalty paid.

The High Court, in its decision, considered the excess royalty payment as a capital expenditure, thereby disallowing the deduction claimed by the assessee. However, the Supreme Court disagreed with this approach, emphasizing that the High Court should have only determined the permissibility of the deduction under section 10(4) of the Act. It was established that there was no imposition of income-tax, super-tax, or excess profits tax in the State of Kotah during the relevant years. Therefore, the excess royalty payment was not made in lieu of any taxes and should be considered a permissible allowance under section 10(2)(xv). The Court further clarified that the payment was not a capital expenditure but rather a commercial payment made out of commercial expediency, similar to the minimum royalty paid.

In conclusion, the Supreme Court allowed the appeals, set aside the High Court's decision, and ruled in favor of the assessee, stating that the excess royalty payment is deductible under section 10(2)(xv) of the Act. The Court awarded costs to the assessee and allowed one hearing fee.