Gujarat High Court
Commissioner Of Income Tax vs Zaverchand Gaekwad (P) Ltd. on 2 August, 2005
Equivalent citations: (2006)202CTR(GUJ)94
JUDGMENT D.A. Mehta, J.
1. The Tribunal, Ahmedabad Bench "B", has referred the following two questions under Section 256(1) of the IT Act, 1961 (the 'Act'), at the instance of the CIT, Baroda:
Common question for asst. yrs. 1982-83 to 1984-85:
Whether, the Tribunal is right in law and on facts in holding that the assessee is entitled to deduction in respect of royalty paid to Enertom Systems at the rate of 2 per cent on the sale of bellow expansion joints?
Question for asst yr. 1984-85 only:
Whether, the Tribunal is right in law and on facts in holding that if the unpaid sales-tax liability is paid before the due date of filing the return under Section 139(1), disallowance cannot be made under the provisions of Section 43B, even though the first proviso to Section 43B was inserted w.e.f. 1st April, 1988?
2. The assessment years are 1982-83, 1983-84 and 1984-85. The relevant respective accounting periods are the years ended on 30th June, 1981, 30th June, 1982 and 30th June, 1983. The assessee claimed deduction of royalty payment on the basis of an agreement entered into with Enertom Systems, Baroda, on 12th Sept, 1979. The AO treated the same as capital expenditure and disallowed the same.
3. The assessee carried the matter in appeal before the CIT(A) who confirmed the disallowance by treating the payment as outright purchase of technical know-how. The assessee carried the matter in second appeal before the Tribunal. It was contended before the Tribunal that payment of royalty was in the nature of revenue expenditure as it was akin to license fee. The Tribunal accepted the submission vide its order dt. 30th July, 1992, by observing as under:
...The case of the assessee is that the payment of royalty in fact is comparable to an expenditure almost to that of a license fee which is of revenue expenditure. We are of the opinion that the plea of the assessee is valid as the royalty is payable for certain period of time as long as the assessee could use the technical know-how.
4. Heard, Mrs. M.M. Bhatt, the learned standing counsel for the applicant-Revenue. It was submitted by her that once the CIT(A) had found that royalty payment was towards outright purchase of technical know-how, the Tribunal had committed an error in treating the same as revenue expenditure. She invited attention to the relevant parts of the assessment orders and the order of CIT(A) in support of her contention.
5. Though served, there is no appearance on behalf of respondent-assessee.
6. It is an admitted fact that the royalty agreement is not on record. It is not possible to state that the Tribunal has committed any error in interpreting the document in absence of the availability of the document. The agreement was entered into on 12th Sept., 1979. The AO has observed in the assessment order that the royalty payment was disallowed in the earlier year. However, the learned Counsel is not in a position to state as to what has happened in the earlier year.
7. While recording the facts, the CIT(A) has found that payment of royalty was required to be made at the rate of 2 per cent on net sales exceeding Rs. 18 lakhs, subject to a maximum royalty of Rs. 1,15,000 per year for a period of five years. In these circumstances, considering the basis on which royalty was to be worked out, it is not possible to find any infirmity in the reasoning of the Tribunal. The Tribunal has correctly held the payment for royalty to be on revenue account and hence, allowable as a deduction.
8. Accordingly, question No. 1 which is common for all the three years is answered in the affirmative i.e., in favour of the assessee and against the Revenue.
9. Insofar as question No. 2 is concerned, the learned standing counsel has submitted that the issue raised by the said question stands concluded in favour of the assessee by the apex Court decision in the case of Allied Motors (P) Ltd. v. CIT . Following ratio of the said decision it is held that the Tribunal was right in law and on facts in holding that unpaid sales-tax liability, if paid before the due date of filing the return of income-tax under Section 139(1) of the Act, cannot be disallowed under the provisions of Section 43B of the Act. Accordingly, the second question is answered in the affirmative i.e., in favour of the assessee and against the Revenue.
10. The reference stands disposed of accordingly. There shall be no order as to costs.