Commissioner of Income Tax vs Asia Match Co. (P.) Ltd.

K.A. Thanikkachalam J.

At the instance of the Department, the Tribunal referred the following questions, for the opinion of this court, u/s 256(1) of the Income Tax Act,

1961, read with section 18 of the Companies (Profits) Surtax Act, 1964 :

Whether the Appellate Tribunal is justified in law in holding that the assessee''s appeal before the Commissioner (Appeals) being regarding the

merits of the Income Tax Officer''s rejection of the assessee''s claim which falls within the scope of section 11(1) of the Act, the Commissioner

(Appeals) should have disposed of the assessee''s appeal dealing with the merits of the assessee''s claim, and not with reference to the scope and

applicability of section 13 of the Companies (Profits) Surtax Act, 1964 ?

Whether, on the facts and the circumstances of the case, the Appellate Tribunal was right in holding that for purpose of computing the

chargeable profits under the Companies (Profits) Surtax Act, 1964, the sum of Rs. 24,437 should be excluded from the total income as arrived at

in the Income Tax assessment, as representing ''royalty'' even though the said sum cannot be treated as ''royalty'' within the meaning of section

80MM of the Income Tax Act, 1961 ?

For the assessment year 1976-77, the assessee in its surtax return had shown the chargeable profits under the First Schedule to the Surtax Act,

as Rs. 26,35,744. In the assessment order, there was no mention with regard to the assessee''s claim for deduction of royalty of Rs. 24,239. The

assessee in its letter dated January 10, 1979, to the Income Tax Officer, stated that the royalty of Rs. 24,239 was not deducted as claimed by the

assessee, while computing the chargeable profits. Accordingly, the assessee requested the Income Tax Officer to issue a revised order, rectifying

the above mistake u/s 13(1) of the Act. The assessee also sent a reminder on April 3, 1980. The Income Tax Officer sent a reply dated April 3,

1980, enclosing a copy of his revised order dated January 31, 1979. The Income Tax Officer pointed out that the royalty of Rs. 24,239 was not

deducted since the assessee has not obtained approval from the Central Board of Direct Taxes for the agreement for receipt of royalty as per the

provisions contained in section 80MM of the Income Tax Act. Hence, according to the Income Tax Officer, royalty cannot be deducted while

computing the chargeable profits, since the assessee has to obtained the approval from the Central Board of Direct Taxes for the agreement for

payment of royalty. On appeal, the Commissioner of Income Tax held that there is no mistake in the order to be rectified u/s 13(1) of the Act.

Accordingly, the appeal by the assessee was dismissed. On further appeal, the Appellate Tribunal following its earlier order in STA No. 13

(MDS) of 1977-78, C-Bench of the Tribunal, order dated May 6, 1978, accepted the assessee''s contention and held that the royalty payment of

Rs. 24,239 was deductible as a deduction while computing the chargeable profits of the company.

Learned standing counsel appearing for the Department submitted before us that the Tribunal was not correct in permitting deduction of the

royalty payment while computing the chargeable profits of the company. Accordingly, learned standing counsel submitted that without the approval

from the Central Board of Direct Taxes of the agreement for payment of royalty, deduction cannot be allowed while computing the chargeable

profits under rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act. On the other hand, learned counsel appearing for the assessee,

while supporting the order passed by the Tribunal, submitted that the approval of the Board of the agreement for payment of royalty is not

necessary for claiming deduction of royalty payment while computing the chargeable profit of the company, as it was prescribed u/s 80MM of the

Act. It was, therefore, pleaded that there was no infirmity in the order passed by the Tribunal in allowing deduction of the royalty payment under

rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964.

We have heard both learned standing counsel for the Department as well as the assessee. The fact remains that while filing the return for the

assessment year under consideration, the assessee claimed deduction of royalty payment amounting to Rs. 24,239 while computing the chargeable

profits of the company. In the original assessment, the Income Tax Officer did not mention anything about this deduction. Thereafter, the assessee

wrote a letter seeking deduction of royalty payment as deduction under rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act,

1964. The Income Tax Officer pointed out that without the approval by the Central Board of Direct Taxes of the agreement for payment of

royalty, it cannot be allowed as a deduction as per the provisions contained in section 80MM of the Income Tax Act, 1961. Therefore, under the

Companies (Profits) Surtax Act also such a deduction is not possible without the approval of the Board. However, the Tribunal considering the

provisions contained in rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, held that the approval of the Central Board of

Direct Taxes is not necessary for allowing deduction of royalty payment while computing the chargeable profits of the company, because the

embargo for allowing the royalty as a deduction as placed u/s 80MM of the Income Tax Act, 1961, is absent in the provisions contained in rule

1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964. Inasmuch as the Tribunal was correct in coming to the conclusion that the

royalty payment is deductible as a deduction under rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, while computing

the chargeable profit of the company, we consider that there is no infirmity in such an order passed by the Tribunal. Accordingly, we answer

question No. 2 referred to us in the affirmative and against the Department.

In so far as question No. 1 is concerned, the Department is aggrieved by the order passed by the Tribunal on the merits, since the

Commissioner of Income Tax has not disposed of the appeal on the merits. In the original assessment order, the Income Tax Officer failed to

consider the deduction claims with regard to royalty payment. Subsequently, on a letter given by the assessee, the Income Tax Officer passed an

order on January 31, 1979, stating the reasons for not allowing the deduction as claimed by the assessee. Therefore, the assessee filed an appeal

before the Commissioner of Income Tax stating that the Income Tax Officer was not correct in not rectifying the mistake involved in the original

order u/s 13 of the Act. The Commissioner of Income Tax, however, head that the Income Tax Officer was correct in not rectifying the mistake as

alleged by the assessee. But no order was passed by the Commissioner on the merits. The assessee filed a second appeal before the Tribunal. The

Tribunal held that the appeal preferred by the assessee before the Commissioner of Income Tax would fall u/s 11(1) of the Act and, therefore, the

appeal is competent even on the merits. In that view of the matter, the Tribunal following an earlier order of its own, on a similar point, allowed the

claim made by the assessee. Inasmuch as the appeal preferred by the assessee was deemed to be u/s 11(1) of the Act and inasmuch as the

Tribunal dealt with the issue on the merits, even though the Commissioner has not dealt with the same on the merits we consider that there is no

infirmity in the order passed by the Tribunal on this aspect. Accordingly, we answer question No. 1 referred to us in the affirmative and against the

Department. No costs.