Bombay High Court
Tyresoles Goa Pvt. Ltd. vs Commissioner Of Income-Tax on 9 April, 1991
Equivalent citations: [1992]193ITR649(BOM)
JUDGMENT T.D. Sugla, J.
1. This is a reference at the in stance of the assessee. It relates to the assessee's assessment for the assessment year 1964-65, 1965-66, 1966-67 and 1967-68. The Income-tax Appellate Tribunal has referred to this court the following two questions of law for opinion under section 256(1) of the Income-tax Act, 1961 :
"(1) For the assessment years 1964-65, 1965-66 and 1966-67 :
Whether, on the facts and in the circumstances of the case, and more particularly in view of the fact that, before the assessments for the assessment year 1964-65, 1965-66 and 1966-67 were finalised, the Government had fixed a lower percentage of royalty, the Tribunal had erred in holding that the amount of royalty higher the what was actually allowed to be remitted was to be deducted in computing the total income ?"
(2) For the assessment year 1967-68 :
Whether, on the facts and in the circumstances of the case, the tribunal erred in law in treating the sum of Rs. 36,571 being the difference between the original liability and the revised liability of royalty brought by way of credit in the books, as the income of the assessee in the assessment year 1967-68 under section 41(1) of the Income-tax Act, 1961 ?"
2. The assessee is a private limited company carrying on business in retreading of old tyres. Its previous year is the calendar year. The company uses a special type of rubber (camel black) for pasting on the surface of old tyres. On November 3, 1960, the assessee-company entered into an agreement the assessee had agreed to pay to the foreign company in sterling for license fee at the rate of 4 1/2 pence per pound of tread rubber, etc., used by the assessee. At the relevant time, the assessee was carrying on business in Goa which was then a Portuguese colony. Subsequently, Goa has become part of India.
3. For the assessment year 1964-65, 1965-66 and 1966-67, the assessee-company has been debiting license fees payable to the foreign company at the agreed rate of 4 1/2 pence per pound of tread rubber used. After Goa became a part of our country, it became necessary for the assessee-company to obtain the Government of India's by its letter dated May 18, 1965, sanctioned payment of license fee/royalty to the foreign company at the rate of 1 1/2 pence per pound only as against 4 1/2 pence per pound agreed to by the parties. It is in these circumstances the, while the assessee had debited its profit and loss account for the calendar years 1963, 1964 and 1965 relevant for the assessment year 1964-65, 1965-66 and 1966-67, with license fee calculated at the rate of 4 1/2 pence per pound of rubber used, for the calendar year 1966, relevant for the assessment year 1967-68 it took the view that the amount of license fee/royalty was actually payable by it at the rate of 1 1/2 pence per pound only and accordingly, wrote off the amount debited as a license fee to the profit and loss account in the earlier three years in excess of 1 1/2 pence per pound.
4. However, at the time of assessment, the assessee claimed that its actual liability in respect of license fee/royalty payable to the foreign company was only 1 1/2 pence per pound of rubber used and the deduction should be allowed to it to that extent only. The Income-tax Officer on the other hand held that in those years, the agreement was in operation, the Government of India letter sanctioning payment of 1 1/2 pence per pound only as against 4 1/2 pence per pound, as per the agreement, came subsequently; therefore, so far as the three year under reference were concerned the assessee was entitled to the deduction on the basis of license fee/royalty at the rate of 4 1/2 pence per pound of rubber used. The Income-tax Officer also held that as a natural corollary, for the assessment yea 1967-68, for the amount written off by the assessee as being not payable in respect of which deduction was being allowed in those years, the assessee was liable to be assessed under section 41(1) of the Income-tax Act, 1961.
5. The assessee's appeal before the Appellate Assistant Commissioner was successful. However, the Tribunal allowed the departmental appeal and restored the order of the Income-tax Officer.
6. It is vehemently argued before us by Shri Dalvi, learned counsel for the assessee, that the Government of India sanction to the payment of license fee/royalty to the foreign company was necessary before any remittance could be made to the foreign company in respect of license fee; that the Government of India, by its letter dated May 18, 1965 permitted the assessee to pay license fee at the rate of 1 1/2 pence per pound of trade rubber used and not at 4 1/2 pence per pound of tread rubber used as per the agreement. In particular, Shri Dalvi invited our attention to the fact that when negotiations at the instance of the foreign company through the Trade Commissioner failed, the assessee and the foreign company eventually entered into another agreement in the year 1969, in terms of which license fee/royalty was agreed to be paid at the rate of 1 1/2 pence per pound of rubber used with retrospective effect from October 1, 1961. Accordingly it was his submission that the assessee was entitled to the deduction in respect of license fee/royalty at that rate only right from the year 1961. If the license fee/royalty was allowed at the rate of 1 1/2 pence per pound of rubber used, there will be no question of remission in the calendar year 1966 relevant for the assessment year 1967-68.
7. Dr. Balasubramanian, of the other hand, strongly relied on the order of the Income-tax Appellate Tribunal. In particular, he contended that the government of India having sanctioned payment of only 1 1/2 pence per pound of rubber used in July, 1965, there is no justification whatsoever in the assessee's claim that even for the calendar years 1963 and 1964, deduction should be allowed on that basis and not on the agreed basis. It may not be out of place to mention here that is Shri Dalvi had faintly argued that, assuming that the assessee was allowed deduction at the rate of 4 1/2 pence per pound of rubber used in the earlier year, there would still be no case for remission in the calendar year 1966 relevant for the assessment year 1967-68, as neither the Government of India's sanction letter was issued in that year, nor was the subsequent agreement entered into in that year. In this context, he pointed out that the Government of India's letter is dated July 29, 1965, whereas the subsequent agreement was entered into in the year 1969. Both these events having not taken place in the year 1966, Shri Dalvi argued that the question of remission in that year under section 41(1) of the Act would not arise.
8. We have considered the rival contentions carefully. In our opinion, Dr. Balasubramanian is right to the extent that in view of the Government of India's letter sanctioning license fee at 1 1/2 pence per pound of rubber use as against 4 1/2 pence per pound of rubber used as per the agreement in the year 1965 only, there is no justification whatsoever in the assessee's claim that, in the calendar year 1963 and 1964, which are relevant for the assessment year 1964-65 and 1965-66, deduction should be allowed on the basis of rates sanctioned by the Government and not on the basis of rates agreed upon. So far as the calendar year 1965 is concerned, however, we are in agreement with shri Dalvi the Government of India's letter having been received during that year, the assessee could not possibly claim deduction at a higher rate the rate sanctioned by the Government of India. Accordingly we answer the first question in so far as it relates to the assessment years 1964-65 and 1965-66 in the negative to the assessment year 1966-67 is concerned, we answer the question in the affirmative and in favour of the assessee.
9. As regards the question whether there was remission of the liability in respect of license fee in the calendar year 1966, relevant for the assessment year 1967-68, we find that in their report to the shareholders, the directors of the assessee-company for the calendar year 1966-67 observed as under :
II. Explanations to the auditor's remarks :
1. The original agreement with Messrs. Tyresoles (Overseas) Ltd. Wembley, provided payment of royalty at 4 1/2 d. per pound of tread rubber consumed and accordingly the company applied to the Government for approval of this agreement and the remittance of royalty payable. The Government having considered the issue, informed the company by their letter dated 18-5-1965 that the royalty of only 1 1/2 d. per pound of rubber used could be approved. And on this basis the Government asked the company to enter into an agreement with the principals, Messrs. Tyresoles (Overseas) Ltd. Wembley.
Messrs. Tyresoles (Overseas) Ltd. while appreciating our position informed the company that they will take up the matter with the Government of India through the Trade Commissioner of U. K. in New Delhi. The company readily agreed to the suggestions as it desired that the contractual terms with their principals should be maintained and, therefore, the company assured full co-operation in their efforts for obtaining a revision in the rate of royalty payable.
It is now found that the Government of India is not inclined to consider a any revision of the rate of royalty already sanctioned They had not so far given this is writing to the Trade commissioner of the U. K. in New Delhi but the officer concerned had expressed this view One of the reasons put forward by the Government in turning down the request was that the concessionaires for the Tyresoles (Overseas) Ltd. London in the rest India have been authorised to pay the royalty only at the rate of 1 1/2 pence and they cannot consider a separate rate of royalty to Goa which is now a part of India.
It is now certain that Government of India shall not sanction royalty at any enhanced rate than 1 1/2 pence per pound. It was therefore, considered that the provision made so far at the rate of 4 1/2 pence per pound is unnecessary. The excess provision, therefore, has been written back after making provision for taxation on the excess of provision of royalty written back.
The directors are also taking steps to execute a formal contractor with Messrs. Tyresoles (Overseas) Ltd., for varying the rate of royalty from 4 1/2 pence per pound to 1 1/2 pence per pound."
10. The paragraph, read as a whole, clearly, to our mind, indicates that both parties, i.e., the assessee and the foreign company, had reconciled to the payment of license fee t the rate of 1 1/2 pence per pound of rubber used during the calendar year 1966. It is only the execution of the formal contract that was delayed or happened in the subsequent year. Under the circumstances, we do not agree with Shri Dalvi that it is only a unilateral act on the part of the assessee-company to writ off its liability. It is a writing-off done by the assessee with the consent of the foreign company. In that view of the matter, we answer the second question pertaining to the assessment year 1967-68 as under :
The liability in respect of royalty written off to the extent it pertains to years other than the assessment year 1966-67 is to be treated as the income of the assessee under section 41(1) of the Income-tax Act.
11. There will be no order as to costs.