Commissioner of Income Tax vs A.R. Gulati, Voluntary Liquidator, Orissa Paper Mills Co. Ltd.

Arijit Pasayat, C.J.—The following question has been referred for the opinion of this court u/s 256(1) of the Income Tax Act, 1961 (in short "the Act"), by the Income Tax Appellate Tribunal, Delhi Bench-C (in short "the Tribunal") :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing the Income Tax Officer to allow the entire amount of Rs. 1 lakh representing minimum royalty payable to the Government of Orissa ?"

The assessment year involved is 1975-76.

The factual position as noted in the statement of case is as follows :

The assessed-company was incorporated in the accounting year 1971-72, relevant to the assessment year 1973-74 as its previous year ended on August 31 of the relevant financial year. One Basti Sugar Mills Company Limited was the promoter of the company. The dominant object of incorporation was setting up of a paper mill in the district of Koraput in the State of Orissa for manufacture of 60,000 tonnes of paper per annum. For this purpose, it was granted a letter of intent on January 30, 1971, by the Government of India. With a view to have supply of raw material in the form of bamboos, the promoter company, i. e., Basti Sugar Mills Company Limited, entered into an agreement with the Government of Orissa on September 17, 1971, effective from October 1, 1971. The currency of the agreement was 24 years from October 1, 1971. By virtue of this agreement, the assessed was granted the right to gather bamboos from the forests in the State of Orissa. The lessee was required for the first six years commencing from October 1, 1971, to pay royalty at Rs. 2 for 100 bamboos and for the remaining six years ending on September 30, 1983, at Rs. 4 per 100 bamboos. The grantor had reserved the right to revise the rate of royalty for the remaining period of 12 years. These terms were contained in Clause 10 of the agreement. Clause 13 of the agreement, however, provided for the payment of minimum royalty at Rs. 1 lakh per annum for the first three years, at Rs. 1,50,000 for the fourth year, at Rs. 3 lakhs for the fifth year, Rs. 4,50,000 for the sixth year and Rs. 12,00,000 for 7th to 12th year.

In terms of the above, the assessed had to pay a sum of Rs. 1 lakh as minimum royalty for the assessment year under reference because the actual royalty calculated on the bamboos extracted was less than that amount. This was allowed by the Income Tax Officer in the computation of the assessed''s income. The profit and loss account for the year ending on August 31, 1974, relevant to the assessment year under consideration, disclosed income from the sale of bamboos, interest and consultancy fees aggregating in all to Rs. 4,18,113. The assessed claimed expenditure of Rs. 5,06,832. The Income Tax Officer while computing the income allowed only Rs. 2,22,419 including the royalty amounting to Rs. 1 lakh. He did not give any specific reason for disallowance of the other claims. The assessed carried the matter in appeal before the Appellate Assistant Commissioner ("the AAC" in short). The said authority was of the view that the Income Tax Officer committed errors in computing the income from consultancy fees as also in allowing expenditure. He was of the view that only actual royalty relatable to the sale of bamboos of Rs. 2,43,021 would be allowed, He also observed that the payment of minimum royalty was the responsibility of the promoter company. Accordingly, he enhanced the income from consultancy services to Rs. 2 lakhs and allowed Rs. 30,000 against the sale of bamboos and Rs. 50,000 against the consultancy income besides allowing Rs. 56,500 on the basis of the sale of bamboos. The assessed preferred appeal before the Tribunal. It was contended that the minimum royalty paid was clearly allowable. The Tribunal accepted the submission with the following observations :

"We have given our careful thought to the whole matter. The observations of the Appellate Assistant Commissioner that payment of royalty was the responsibility of the promoter company, in our opinion, are irrelevant in the context of the matter. Para. 3 of Schedule ''B'' annexed to and forming part of the balance-sheet and profit and loss account for the year ended August 31, 1974, clearly states that the letter of intent for establishing paper and pulp mill was transferred in the earlier year from the promoter company to the assessed-company. It was also decided at that time to get transfer of lease hold rights of forests from the said promoter company in favor of the assessed-company. However, in the meantime the lease of the forest was terminated on September 29, 1974, by the Government of Orissa as the assessed''s letter of intent was not renewed by the Government of India on August 14, 1974. Because of this, the lease of the forest could not be transferred to the assessed-company. However, to us that appears immaterial. The assessed-company had got transferred the letter of intent from the promoter company and had also started doing business in the sale of bamboos in its own name. Obviously, Therefore, it was also responsible to meet all the expenditure relating thereto including the payment of royalty. The assessed-company was also bound by the terms of the agreement dated September 17, 1971, entered into by its promoters on its behalf, In fact this position has not been disputed by the Appellate Assistant Commissioner when he himself has in terms of Clause 10 of the said agreement allowed a part of the royalty amounting to Rs. 56,500. We fail to understand why Clause 13 of the same agreement was not binding on the assessed and was binding" only on the promoter company. In our opinion, the assessed-company in terms of Clause 13 of the said agreement was liable to pay the minimum royalty and had in fact paid it to the Government of Orissa. We, Therefore, direct the Income Tax Officer to allow the entire amount of Rs. 1 lakh."

On being moved for a reference, the question as set out above has been referred for the opinion of this court.

We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessed when the matter was called. Learned counsel for the Revenue submitted that the Tribunal''s approach was erroneous.

We find that the liability to pay royalty was clearly stipulated in Clauses 10 and 13 of the agreement. The assessed-company had got the letter of intent transferred in its favor from the promoter company and had started doing business in the sale of bamboos in its own name. In terms of Clause 13 minimum royalty was payable to the Government of Orissa. That being the factual position, the conclusions of the Tribunal are irreversible. Accordingly, we answer the question referred in the affirmative, in favor of the assessed and against the Revenue.