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TMI Blog1979 (7) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... h for quarrying flooring stones was as under : " 18. (i) In consideration of the concessions and privileges granted by the GRANTOR and in lieu of income-tax, super-tax and excess profits tax, the GRANTEE covenants to pay to the GRANTOR royalty on the stone excavated at the rate of rupee one per 100 sq. ft., subject to the minimum amount of Rs. 1,50,000 per financial year, provided that the aforesaid rate of Re.1 per 100 sq. ft., will be operative so long as the selling rate of unpolished slabs does not exceed Rs. 10 per 100 sq. ft.; in the event of the selling rate going above this figure the royalty per 100 sq. ft. shall be increased by 25% of the excess over ten rupees. (ii) The minimum royalty will be payable in four equal instalments in advance every quarter. Provided that if in any quarter the royalty payable calculated at the rate mentioned in sub-para. (1) exceeds the instalment of minimum royalty paid in advance for that quarter, the balance shall be made up within the next quarter. " The Kotah State merged with the United State of Rajasthan and the Indian I.T. Act, 1922, was brought into force in the newly formed State of Rajasthan with effect from April 1, 1950. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid decree and order passed by the learned district judge, Kotah, which was partly allowed by this court. The High Court held that the agreement dated May 2, 1945, became void on the coming into force of the Constitution of India on January 26, 1950, or from April 1, 1950, as it granted monopoly rights to the assessee-company for quarrying stones in the specified areas and that the royalty was payable thereafter by the assessee-company to the State of Rajasthan in accordance with the provisions of the Rajasthan Miner Mineral Concessions Rules. The High Court also held that the amount paid by the assessee-company to the State Govt. of Rajasthan, in excess of the amount payable by way of royalty, was refundable to the assessee-company. We have been informed by the learned counsel for the parties that an appeal in the matter is still pending before the Supreme Court of India. We may, however, note that although the suit of the assessee-company was dismissed by the learned district judge, Kotah, as against the Union of India, yet the assessee-company did not prefer any appeal in that matter before the High Court, with the result that the order passed by the learned district judge, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e such proceedings were initiated under s. 34(1)(a) of the Act, they could not be upheld as having been made under s. 34(1)(b) of the Act. The Tribunal also held that the portion of the excess royalty paid by the assessee-company to the State Govt., which was equivalent to the tax liability of the assessee-company, could not be held as permissible deduction, as the income-tax and other taxes were payable to the Union Govt. However, the remaining portion of the excess royalty, which was left out by way of residue, after deducting the amount paid in lieu of tax liability by the assessee-company, out of the excess royalty, was permissible deduction on the basis of the principles laid down by their Lordships of the Supreme Court in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718. It was further held by the Tribunal that the royalty paid on polished stones, in accordance with the provisions of cl. 19 of the agreement, constituted a part of the cost of the stones and is a permissible deduction, being an expenditure of revenue nature. The Tribunal lastly held that the assessee-company was entitled to the credit of that portion of the royalty, which was paid by it in lieu of income-tax and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missible deduction in the assessment years 1950-51 to 1960-61 ? 5. Whether an appeal can lie against an order levying penal interest under section 18A of the Act for the assessment years 1957-58 to 1961-62 ? 6. 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 ? 7. Whether, on the facts and in the circumstances of the case, the payment of royalty in excess of Rs. 1,50,000 paid under clause 18 of the lease granted by the Government of His Highness the Maharaja Saheb of Kotah on May 2, 1945, which has been held to be in lieu of income-tax, super-tax, etc., by the District Judge, Kotah, is a permissible deduction in the assessment years 1957-58 to 1960-61 ? " We shall now proceed to deal with the aforesaid questions seriatim. Question No. 1. It is well settled that proceedings for reassessment under s. 34 of the Act could be initiated if on account of the omission or failure on the part of the assessee-company to disclose fully and truly all material facts necessary for its assessment for that year, income, profits or gains chargeable to income-tax ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be assessed and demanded for the assessment years 1950-51 and onwards was stayed till the disposal of the suit. . Ultimately, the suit filed by the assessee-company was dismissed so far as the Union of India was concerned with the result that the judgment passed by the District judge, Kotah, on August 23, 1957, had no binding effect, so far as the rights of the Union of India relating to the recovery of income-tax and other taxes from the assessee-company were concerned. The District Judge, Kotah, made a reference to the High Court as to whether the provisions of cl. 18 of the grant, made in favour of the assessee-company by the then Maharaja of Kotah, created any legal obligation not to levy income-tax, etc., on the income or profits of the assesseecompany for the duration of the grant and whether the obligation contained in the aforesaid cl. 18 of the said grant not to levy income-tax, etc., devolved upon the Union of India and the Indian I.T. Act, 1922, was not applicable to the assessee-company. The High Court decided all these issues against the assessee-company and on appeal their Lordships of the Supreme Court affirmed the decision of the High Court. It was held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion that the ITO was aware of the proceedings in the suit pending in the Court of the District judge, Kotah. There can be no doubt that on account of the fact that an injunction order, which was passed by the District judge, Kotah, and the modified injunction order passed by him subsequently, were served on the ITO, he must have been aware of the pendency of the suit in the court of the District judge, Kotah, but it is not the case of the assessee-company that a copy of the plaint filed by it in the court of the District judge, Kotah, was ever submitted to or made available by the assessee-company to the ITO. It must also be pointed out that the ITO, was not a party to the said suit, which was filed by the assessee-company in the court of the District judge, Kotah, as there were only two parties thereto, namely, the Union of India and the State of Rajasthan. In these circumstances, it cannot be held that the ITO must have been aware of the contents of the plaint filed by the assessee-company in the court of the District judge, Kotah, or pleas taken therein. Besides that, as the case of the assessee-company before the ITO was that the assessee-company was exempted fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that there had been any nondisclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief." Thus, the court can go into and examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. Once the court comes to the conclusion that the ITO had reasonable grounds for thinking that there was non-disclosure on the part of the assessee-company, which led to non-assessment or underassessment of the income or profits of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out that the burden to disclose facts was primarily on the assessee and any knowledge about the pendency of the suit on the part of the department cannot dispense with the necessity on the part of the assessee to discharge its duty to disclose all primary facts material for its assessment for that year. The assessee-company cannot, therefore, be absolved from its duty to disclose fully or truly all the relevant facts material for the purpose of assessment, merely on the ground that the assessee-company had filed a suit in the Court of the District Judge, Kotah, against the Union of India and the ITO might have had an opportunity of finding out the facts which the assessee-company disclosed or relied upon in the plaint in that suit. In TS. PL. P. Chidambaram Chettiar v. CIT [1966] 62 ITR 774 (Mad), it was held that for invoking jurisdiction under s. 34(1)(a) of the 1922 Act and initiating action under the said provision, it is not necessary that omission or failure on the part of the assessee and actual escapement of income from assessment should be found as a condition precedent. It would suffice if the ITO has reason to believe that income has escaped assessment on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the 1922 Act were rightly issued in respect of the assessments relating to the assessment years 1950-51 to 1956-57. Question No. 2 In view of our finding in respect of question No. 1, it is no longer necessary for us to decide as to whether the assessments for the assessment years 1954-55 and 1956-57 could be reopened under s. 34(1)(b) of the Act. However, as the learned counsel for the parties have advanced lengthy arguments on merits, we consider it proper to answer this question as well. It is not in dispute that the proceedings for reassessment for the assessment years 1954-55, 1955-56 and 1956-57 were taken within a period of four years from the date of completion of the original assessment proceedings and as such those reassessment proceedings could have been validly made under s. 34(1)(b) of the Act. For the application of the provisions of s. 34(1)(b) of the 1922 Act only this much is necessary that the ITO should have reason to believe, in consequence of information which might have come into his possession, that income chargeable to tax has escaped assessment. It is also not disputable now, as it is the case of the assessee-company itself, that the amount of royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an omission or failure on the part of the assessee to mention all material facts, but such an omission or failure was not in respect of the facts which were known to the assessee at the time when the return was filed and, therefore, was not deliberate. In Mriganka Mohan Sur v. CIT [1974] 95 ITR 503, it was held by a Division Bench of the Calcutta High Court that cls. (a) and (b) of s. 34(1) do not deal with two separate jurisdictions. Although two separate periods of limitation are prescribed in respect of the aforesaid two clauses, yet as some of the conditions are common and in case the conditions which are common are fulfilled and proceedings are initiated within the period of limitation provided under the other clause, then action taken under one clause of s. 34 might be justified with reference to the power vested under the other clause. Learned counsel for the assessee-company placed strong reliance upon the decision of their Lordships of the Supreme Court in Johri Lal v. CIT [1973] 88 ITR 439. But that case dealt with an entirely different situation and cannot be made applicable to the case before us. In that case, notice was issued under s. 34(1)(b) of the Act and it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a), then, in our opinion, there was nothing to prevent the appellate court from invoking the provisions of s. 34(1)(b) provided the pre-requisite conditions for the application of cl. (b) are satisfied. A closer examination of the provisions of cls. (a) and (b) of s. 34(1) of the Act indicates that both of them deal with the power of reopening cases of income escaping assessment and making reassessments and although they covered different contingencies and situations, they do not deal with separate jurisdictions. It cannot be said that cls. (a) and (b) of s. 34(1) are mutually exclusive. Although it is true that if action is taken under clause (b) of section 34(1) it could not be justified subsequently under cl. (a) of that section for the reasons indicated above. But the reverse is not true and if action is taken under cl. (a) of s. 34(1), then if the other conditions like limitation, prescribed by cl. (b) are satisfied, such action can lawfully be justified under the provisions of cl. (b) of s. 34(1) of the Act. If the information was not sufficient to lead to the formation of the belief or if there was no such information at all, then there was clearly a failure or omission on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess profits tax, etc., cannot be said to be exempt from payment of income-tax. The Tribunal adopted the reasoning of the learned District judge, Bharatpur, in holding that the amount of royalty paid by the assessee-company consisted of three parts, namely, (i) royalty proper, represented by the minimum amount to Rs. 1,50,000 per financial year, (ii) the amount paid in lieu of taxes, viz., income-tax, super-tax and excess profits tax, etc., and (iii) the residue out of the excess royalty. To our mind, a bare reading of cl. 18 of the agreement dated May 2, 1945, leaves no doubt that the royalty amount paid by the assessee-company to the State Govt. consisted of two parts only, namely, the amount paid in consideration of concessions/privileges, which may be termed as royalty proper and the amount paid in lieu of income-tax, super-tax and excess profits tax, which may be termed as the tax component of the total amount of the so called royalty, paid by the assessee-company to the State Govt. The finding recorded by the Tribunal, adopting the decision of the learned district judge, which has been set aside in appeal by the High Court, to the effect that only a sum of Rs. 1,50,000 rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case as " the residue " is of the same nature as the minimum royalty, because the nature of that payment is not in any manner different from that of the minimum royalty paid by the assessee-company and was a permissible deduction, allowable under s. 10(2)(xv) of the Act. It was also observed by their Lordships of the Supreme Court in the aforesaid case that such payment was not made for getting some additional capital asset or even for obtaining any benefit of an enduring nature, but it was paid on the basis of commercial expediency. We, therefore, hold that the so-called residue, which remained out of the excess royalty after the exclusion of the tax component therefrom was in the nature of revenue expenditure and the assessee-company was not liable to payment of tax on such amount. Question No. 4 This question is based upon the provision of cl. 19 of the agreement dated May 2, 1945, which runs as under: " 19. In addition to the royalty mentioned in cl. 18, the GRANTEE have expressly covenanted to pay royalty on polished stone at the rate of Re. 1 per 100 sq. ft. payable every quarter." The amount which was paid by the assessee-company in pursuance of cl. 19 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 30 of the Act and the absence of a specific provision giving a right of appeal against an order imposing penal interest under s. 18A(8) of the Act clearly indicated that no right of appeal was intended to be given against such an order under s. 30 of the Act. However, in a subsequent decision in Mathuradas B. Mohta v. CIT (1965] 56 ITR 269, another Division Bench of the Bombay High Court took a different view and held that the levy of penal interest under s. 18A amounts to levy of tax under the Act. The amount of penalty was tax within the meaning of the Act and as the assessee was " denying his liability " to pay the tax, which is designated as interest under s. 18A(8) of the Act, he had a right to file an appeal under s. 30 of the Act. In the last mentioned case, reliance was placed on two decisions of their Lordships of the Supreme Court in C. A. Abraham v. ITO [1961] 41 ITR 425 and CIT v. Bhikaji Dadabhai Co. [1961] 42 ITR 123, for coming to the conclusion that whatever addition by way of penalty was made in the amount of tax, by reason of the provisions of the Act, was tax. It was also observed that since under sub-s. (8) of s. 18A of the Act, the amount of interest determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest charged against the assessee either under s. 18A(6) or under s. 18A(8) of the Act for some default on his part and the assessee merely challenged the quantum of penal interest charged on him. It was held that in such a case there could be no right of appeal, inasmuch as, in that event, the assessee would not fall within the expression " denying his liability to be assessed under this Act " contained in s. 30(1) of the Act. Thus, in substance, it was held by the Bombay High Court in Daimler-Benz's case [1977] 108 ITR 961 (FB), that if the assessee raised the basic issue that he was not liable to be assessed to advance tax, under s. 18A of the Act, then he is competent to file an appeal to the AAC, since he was denying his liability to be assessed to tax under the Act, within the meaning of s. 30 of the Act, but not otherwise when merely the penal interest imposed under s. 18A(6) or s. 18A(8) was sought to be challenged. It may also be mentioned here that the Allahabad High Court in Pt. Deo Sharma v. CIT [1953] 23 ITR 226, the Andhra Pradesh High Court in Boddu Seetharamaswamy v. CIT [1955] 28 ITR 156 (AP) and the Madras High Court in South India Flour Mills Ltd. v. CBDT [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bom) and, thus, the earlier view taken by that court in Pt. Deo Sharma's case [1953] 23 ITR 226 (All) was adhered to. We may also refer to two more decisions so as to bring out the conflict of decisions on the subject. In CIT v. Sharma Construction Co. [1975] 100 ITR 603, the Gujarat High Court dealt with the provisions of the I.T. Act, 1961, and held that s. 246 of the I.T. Act, 1961, provides for an appeal against different orders enumerated therein and since there is no mention in s. 246 of an order charging interest under s. 139 or charging penal interest under s. 215 of the new Act, no appeal would lie against such order to the AAC. The same view was taken by the Gauhati High Court in K. B. Stores v. CIT [1976] 103 ITR 505. It is well settled that the right of appeal is a creature of statute and unless an appeal is provided for specifically or by necessary intendment, such a right cannot be availed of by any party. As there is no specific provision in s. 30 of the Act, giving a right of appeal in respect of an order imposing penal interest, under ss. 18A(6) or 18A(8) of the Act of 1922, no appeal would be maintainable against the penal interest charged if the same is claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admittedly no amount was at all paid to the Union of India by the assessee-company or by any person on its behalf, which could have been credited towards the tax liability of the assessee-company under the I.T. Act. The Tribunal was clearly in error in directing the ITO to give credit to the assessee-company for the amount of excess royalty which, was paid to the State Govt. by the assessee-company. Merely because the District Judge, Kotah, observed that the Union of India was entitled to, that amount which was paid by the assessee-company to the State Govt. by way of excess royalty on the ground that it was paid in lieu of the income-tax and super-tax liability of the assessee-company, that could not entitle the assessee-company to any credit of such amount from the tax liability of the assessee-company to the Union of India. How could that amount paid by the assessee-company to the State Government of Rajasthan by way of excess royalty, though paid in lieu of tax liability, be treated as payment by the assessee-company to the Union of India towards its tax liability or adjusted towards such tax liability ? In our view, the Tribunal clearly misdirected itself in law in this resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount equal to the tax-liability of the assessee-company for the relevant years, out of the excess royalty, was not a permissible deduction. According to the Tribunal, out of the excess royalty, the portion equal to the tax liability for the same year, may not be held to be a permissible deduction. But the remaining portion or residue out of the excess royalty would partake of the same characters as the minimum royalty of Rs. 1,50,000 and should be held to be a permissible deduction. The Tribunal also held that the State Govt. was entitled to the residue out of the excess royalty over and above the tax liability of the assessee-company and on that basis it was held that the residue out of the excess royalty was a permissible deduction. As the amount of royalty paid by the assessee-company to the State Govt. in excess of the sum of Rs. 1,50,000 was an expenditure of revenue nature and the same is permissible deduction on the basis of the principles laid down by their Lordships of the Supreme Court in Gotan Lime Syndicate v. CIT[1966] 59 ITR 718, and the amount of the royalty paid, even in excess of the minimum royalty of Rs. 1,50,000 under cl. 18 of the lease agreement is a per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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