Punjab-Haryana High Court
Commissioner Of Income Tax-Ii vs M/S Punjab State Forest Development ... on 4 October, 2013
Author: Ajay Kumar Mittal
Bench: Ajay Kumar Mittal, Jaspal Singh
ITA No. 442 of 2009 -1-
IN THE HIGH COURT OF PUNJAB & HARYANA AT
CHANDIGARH
ITA No. 442 of 2009 (O&M)
Date of Decision: 04.10.2013
Commissioner of Income Tax-II, Chandigarh
....Appellant.
Versus
M/s Punjab State Forest Development Corporation Ltd.
...Respondent.
CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.
HON'BLE MR. JUSTICE JASPAL SINGH.
PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant.
Ms. Radhika Suri, Advocate for the respondent.
AJAY KUMAR MITTAL, J.
1. This order shall dispose of two appeals bearing ITA Nos. 660 of 2008 and 442 of 2009 as according to the learned counsel for the parties the questions of law therein are identical. For brevity, the facts are being taken from ITA No. 442 of 2009.
2. ITA No. 442 of 2009 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act") against the order dated 26.3.2009 passed by the Income Tax Appellate Tribunal, Chandigarh Bench "B", Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -2- Chandigarh (in short "the Tribunal") in ITA No. 693/Chandi/2008 relating to the assessment year 2005-06, (Annexure A-3) claiming the following substantial questions of law:-
"(1) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT was correct in deleting the addition of Rs.3,33,22,619/- on account of unpaid royalty and unpaid interest on royalty made by the Assessing Officer by invoking the provisions of Section 43B(a) of Income Tax Act?
(2) Whether on the facts and circumstances of the case and in law, the order of Hon'ble Tribunal is perverse in following the judgment of Apex Court in Kesoram Industries Ltd., 266 ITR 721(SC) that royalty is not tax and directing the Assessing Officer to delete the disallowance made u/s 43B of the Act, ignoring the crucial issue that this judgment no where decides that royalty is not covered u/s 43B of the Income-tax Act and also ignoring the fact that section 43B(a) not only includes tax but also any sum payable by way of duty, cess or fee by whatever named called?"
3. Briefly stated, the facts necessary for adjudication of the present appeal as narrated therein are that the assessee is a Corporation set up by the Punjab Government for harvesting of trees and filed its return on 30.10.2005 for the assessment year 2005-06 declaring income from business and profession at `1,28,25,590/-. The said return was processed under Section 143 (1) of the Act on 17.1.2006. The case was selected for scrutiny and Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -3- notice under Section 143(2) of the Act was served on the assessee on 26.10.2006. Notice under Section 142(1) along with questionnaire was issued on 22.6.2007 and thereafter another notice was issued and served on the assessee. In pursuance thereto, reply was filed. The Assessing Officer on examining the records, vide order dated 10.12.2007 (Annexure A-1) made addition of `3,33,22,619/- under Section 43B(a) of the Act on account of unpaid royalty to the Forest Department, Punjab. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity "the CIT(A)"] who vide order dated 30.6.2008 (Annexure A-2) sustained the addition made by the Assessing Officer. Still dissatisfied, the assessee took the matter before the Tribunal by way of appeal. The Tribunal vide order dated 26.3.2009 (Annexure A-3) allowed the appeal. Hence, the present appeal by the revenue.
4. Learned counsel for the appellant-revenue submitted that the royalty which was payable by the assessee-respondent to the Forest Department under Indian Forest Act, 1927 (in short the "1927 Act") was statutory impost as distinguished from contractual liability. Section 43B(a) of the Act was amended by Finance Act, 1988 w.e.f. 1.4.1989 whereby the words, "cess or fee, by whatever name called" were added. The royalty payable by the assessee to the Forest Department is a statutory levy which constitutes "cess or fee by whatever name called, under any law for the time being in force", in terms of Section 43B(a) of the Act and the same Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -4- having not been paid prior to the filing of the return was not deductible. Section 9(vi) Explanation 2 of the Act was referred to show the meaning of the term 'Royalty' under the Act. Reference was also made to Prem's Judicial Dictionary, and Black's Law Dictionary which define the term "royalty". To substantiate that the royalty paid for purchase of standing trees by the assessee- Corporation is a statutory impost and not contractual liability, learned counsel for the revenue drew support from the following constitutional and statutory provisions:-
(a) Articles 366(28) and 298 of Constitution of India;
(b) Entry 17A, 43 and 47 of Concurrent List III of Schedule VII of the Constitution of India;
(c) Preamble and Sections 39, 40, 50 read with Sections 32, 82 of Indian Forest Act, 1927;
5. For distinction between tax and fee, the judgment of the Hon'ble Supreme Court in Om Parkash Aggarwal v. Giri Raj Kishori and others (1987) 164 ITR 376 (SC), was cited. Referring to Sections 28 and 42 of the Rajasthan Excise Act, 1950, it was pleaded that the judgment of Rajasthan High Court in Commissioner of Income Tax v. Udaipur Distillary Co. Ltd. (2004) 268 ITR 305 (Raj), was not applicable as there is no trading by the State and in such an eventuality, the royalty which was charged by the respondent-Corporation could not be said to be the sale price. The judgment in Commissioner of Income Tax Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -5- v. McDowell & Co. Limited (2009) 314 ITR 167 was also not applicable. The judgment of the Apex Court reported in State of West Bengal v. Kesoram Industries Limited, (2004) 266 ITR 721 (SC) was distinguishable and the decision of the Tribunal based on it was unsustainable.
6. Reliance was placed upon the following judgments:-
(I)Gorelal Dubey v. Commissioner of Income Tax (2001) 248 ITR 3 (SC);
(II)Commissioner of Income Tax. v. Gorelal Dubey, (1998) 232 ITR 246 (MP);
(III)Star Paper Mills Ltd. v. Commissioner of Income Tax (2001) 252 ITR 337 (Cal);
(IV)Commissioner of Income Tax v. Popular Minerals (2002) 258 ITR 593 (Raj);
(V)Commissioner of Income Tax v. Nathan Mining Works (2005) 274 ITR 149 (Mad);
(VI)Commissioner of Income Tax v. Gujarat Industrial Products (2005) 274 ITR 635 (Guj);
(VII)Commissioner of Income Tax v. Gujarat State Forest Development (2007) 288 ITR 28 (Guj);
7. On the other hand, learned counsel for the assessee contended that it was sale simpliciter and the royalty paid was price of the trees. Under the Sale of Goods Act, 1930, sale of Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -6- standing timber is sale of goods as held by the Hon'ble Supreme Court in State of Maharashtra and others v. Champalal Kishanlal Mohota AIR 1971 SC 908. According to learned counsel, no provision of 1927 Act is attracted. Sections 32 and 82 of 1927 Act are pari materia to Sections 13 and 25 of Mines and Minerals Act, 1957 (in short "the 1957 Act") and the Hon'ble Supreme Court in Kesoram Industries Ltd.'s case (supra) has held that royalty is not a statutory tax. Even Sections 39, 40 and 50 of the 1927 Act are also not attracted. Reference was made to the following judgments:-
(i)India Cement Ltd. v. State of Tamil Nadu, (1991) 188 ITR 690(SC);
(ii)Commissioner of Income Tax v. McDowell and Co. Ltd. (2009) 314 ITR 167.
(iii)Amar Chandra Chakraborty v. Collector of Central Excise, AIR 1972 SC 1863;
(iv)Housing Board of Haryana v. Haryana Housing Board Employees' Union and others, AIR 1996 SC 434;
8. Elaborating her submissions, learned counsel for the assessee reiterated that in view of the judgments of the Apex Court in India Cement Ltd. and Kesoram Industries Ltd.'s cases (supra), the royalty payable by the assessee-Corporation to Punjab Forest Department is not a 'tax' and that the provisions of Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -7- Section 43B of the Act are not attracted. Circular No. 528 dated 16.12.1988 uses the expression 'fee' only which refers to a statutory impost and since the royalty payable by the assessee- Corporation is representing only cost of trees paid by the assessee to the State Government, it cannot be construed as a statutory impost. Reference was also made to Articles 366(28) and 298 of the Constitution of India. She submitted that the sale of trees by the Forest Department, therefore, did not show exercising of any power to impose tax by the State Government but only an exercise of its executive power to carry on trade or business and, thus, the payment made by the assessee thereunder does not fall within the ambit of Section 43B of the Act. It was further submitted that the contention of the revenue that payment is a statutory payment under the 1927 Act read with Entry Nos. 17A and 47 of List-III Concurrent list of the Constitution of India is also misplaced. In support, she referred to the provisions of the 1927 Act to contend that there is no charging section in the said Act to collect any tax. According to her, the 1927 Act seeks to consolidate the law relating to forests, the transit of forest-produce and duty leviable on timber and forest-produce. Furthermore, once the trees are sold by the Forest Department, it cannot be suggested that sum which is paid as royalty is a statutory impost but infact the sum paid is out of a contractual obligation. Finally, it was urged that the judgments relied upon by the learned counsel for the revenue are inapplicable to the case of the assessee-Corporation.
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9. We have heard learned counsel for the parties and perused the record with their able assistance.
10. On the basis of submissions made by learned counsel for the parties, the issue that arises for consideration is whether or not royalty to be paid by the assessee to the Forest Department for severing trees would fall in the expression 'any sum payable by way of duty, cess or fee by whatever name called under any law for the time being in force' and is covered by Section 43B(a) of the Act, for which the following aspects require to be delved into:-
a) the scope of Section 43B(a) of the Act after its amendment by Finance Act, 1988;
b) the meaning of the word 'royalty' and whether it amounts to tax or not?
c) the nature of payment made by the assessee - Corporation to the Forest Department.
d) whether in the facts and circumstances, the Tribunal was right in holding that provisions of Section 43B(a) of the Act were not attracted?
11. The provision in dispute is Section 43B, whose relevant portion, as amended by Finance Act, 1988, reads as under:-
"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of ---
(a) any sum payable by the assessee by way of tax, duty cess or fee, by whatever named called, under any law for the time being in force, or XX XX XX Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -9- XX XX XX shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him."
12. From the perusal of the above, it will be seen that said Section provides that notwithstanding anything contained in any other provision of the Act, a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force shall be allowed in the assessment year in which, the sum had been actually paid.
13. It would be appropriate to state that words "cess or fee, by whatever name called" have been inserted in Section 43B(a) of the Act by an amendment made by Finance Act, 1988. Circular No. 528 dated 16.12.1988 issued by the Central Board of Direct Taxes (CBDT) reported in (1989) 176 ITR 154 (Statutes) at page 165 has explained the scope and purport behind the aforesaid amendment as under:-
"The words 'tax' and 'duty' have been the subject matter of judicial interpretation and there is a controversy as to whether they cover statutory levies like cess, fees, etc. Some appellate authorities have held that such cess or fees Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -10- cannot be the expression 'tax' or 'duty'. Such an interpretation is against the legislative intent and, therefore, by way of clarification, an amendment has been carried out to provide that cess or fees by whatever name called, which have been imposed by any statutory authority, including a local authority, will be allowed as a deduction only if these are actually paid."
14. A plain reading of the above circular suggests that the scope of the amendment is limited inasmuch as it seeks to state that ambit of Section 43B(a) of the Act extends to all statutory levies by whatever name called whether tax or duty or cess or fee.
15. Rajasthan High Court in Udaipur Distillary Co. Ltd's case (supra), analysing the scope of Section 43B(a) of the Act after its amendment with effect from 1.4.1989 held that the said provision embraces within its ambit "tax, duty, cess or fee or by whatever name called." The expression "by whatever name called"
derives its colour from preceding words "tax, duty, cess or fee".
This has been used ejusdem genesis and is applicable on the basis that they must fall within the genus taxation" to which the expression "tax, duty, cess or fee" as a group denotes. In other words, it has to be compulsory exaction in the exercise of the State's power of taxation where levy and collection is duly authorized by law as distinct from an amount chargeable on principle as consideration payable under a contract. The relevant observations read thus:-
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"It would be pertinent to note that the expression now used in Section 43B(a) is 'tax, duty, cess or fee or by whatever name called'. It denotes that items enumerated constitute species of the same genus and the expression 'by whatever name called' which follows preceding words 'tax', 'duty', 'cess' or 'fee' has been used ejusdem generic to confine the application of the provisions not on the basis of mere nomenclature, but notwithstanding the name, they must fall within the genus 'taxation' to which the expression 'tax', 'duty', 'cess' or 'fee' as a group of its specie belong, viz. compulsory exaction in the exercise of the State's power of taxation where levy and collection is duly authorized by law as distinct from an amount chargeable on principle as consideration payable under a contract. The principle of statutory interpretation is well known and well settled that when particular words pertaining to a class, category or genus are followed by general words, the general words are construed a limited to things of the same kind as those specified. Thus, rule is known as the rule of ejusdem generic. It applies when,
(i) the statute contains an enumeration of specific words;
(ii) the subjects of the enumeration constitute a class or category;
(iii) that class or category is not exhausted by the enumeration;
(iv) the general term follows the enumeration;
and
(v) there is no indication of a different Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -12- legislative intent.
Reference in this connection may be made to Amar Chandra Chakraborty v. Collector of Central Excise, AIR 1972 SC 1863 and Housing Board of Haryana v. Haryana Housing Board Employee' Union (1996) 89 FJR 283; AIR 1996 SC 434.
The tax', 'duty', 'cess' or 'fee' constituting a class, denotes various kinds of imposts by the State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes a different kind of impost depending on the purpose for which they are levied. This power can be exercised in any of its manifestations only under any law authorizing levy and collection of tax as envisaged under Article 265 which uses only one expression that no 'tax' shall be levied and collected except authorized by law.
It in its elementary meaning conveys that to support a tax, legislative action is essential it cannot be levied and collected in the absence of any legislative sanction by exercise of executive power of the State under Article 73 by the Union or Article 162 by the State. Under Article 366(28) 'taxation' has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. 'Impost' means compulsory levy. The well known and well settled characteristic of "tax" in its wider sense includes all imposts. Imposts in the context have the following characteristics:
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(i) the power to tax is an incident of
sovereignty;
(ii) "law" in the context of article 265 means an
Act of Legislature and cannot comprise an executive order or rule without express statutory authority;
(iii) the term "tax" under article 265 read with article 366(28) includes imposts of every kind, viz., tax, duty, cess or fees;
(iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a "tax" in its technical sense as an impost, general, local or special."
It was concluded that the State Government was charging/receiving the liquor bottling fee from the assessee as consideration for parting with its exclusive privilege to bottle liquor, whether as part of manufacturing process or for facilitating its sale. It was further noticed that it did not alter its character as the price charged by the State for parting with its exclusive privilege to deal in potable liquor was not by way of fee or impost as a facet of taxation as defined in article 366(28) of the Constitution. Where the assessee was maintaining its books of account on the mercantile system, the claim of deduction of expenses incurred by it by way of bottling charges was exigible during the accounting period when it became payable to the State Government. Such liability was allowable deduction as an expenditure in the year in which it was incurred even if actual payment was deferred. Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -14- Section 43B was not attracted in such case. The Hon'ble Apex Court affirmed the aforesaid judgment by dismissing the appeal filed by the revenue as reported in Mc Dowell & Company's case (Supra).
16. Now reference may be made to the meaning of the term 'Royalty' in various dictionaries. According to the learned counsel for the revenue and the assessee, the following would be relevant which reads thus:-
Prem's judicial Dictionary:
"Royalties are payments which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government. Two important features of royalty have to be noticed, they are, that the payment made for the privilege of removing the articles is in proportion to the quantity removed, and the basis of the payment is an agreement."
Black's Law Dictionary "Royalty: A share of the product or profit from real property reserved by the grantor of a mineral lease, in exchange for the lessee's right to mine or drill on the land.
Mineral royalty: A right to a share of income from mineral production."
Wharton's Law Lexicon "Royalty, payment to a patentee by agreement on every article made according to his patent; or to an author by a publisher on every copy of his book sold: or to the owner of minerals for the right of working the same on Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -15- every ton or other weight raised."
Mozley and Whiteley's Law Dictionary "A pro rata payment to a grantor or lessor, on the working of the property leased, or otherwise on the profits of the grant of lease. The word is especially used in reference to mines, patents and copyrights." Stroud's Judicial Dictionary "the word 'royalties' signifies, in mining leases, that part of the reddendum which is variable, and depends upon the quantity of minerals gotten or the agreed payment to a patentee on every article made according to the patent. Rights or privileges for which remuneration is payable in the form of a royalty."
17. Explanation 2 of section 9(vi) the Act also defines 'royalty' as under :
Explanation 2.--For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for--
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -16- technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and(v)."
18. From the above, particularly with reference to Prem's Judicial Dictionary and other Law Dictionaries, it emerges that royalty is the payment made for the minerals extracted. Royalties are payments which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government. Two important features of royalty for removing the articles are - (i) the payment is in proportion to the quantity removed: and (ii) the basis of the payment is an agreement.
19. Adverting to the issue, whether royalty amounts to tax or not, it may be observed that in India Cement Ltd's case (supra), the Hon'ble Supreme Court held that 'royalty' is a tax. In the case of Gorelal Dubey's case (supra), the Hon'ble Supreme Court following the judgment of Constitutional Bench in the case of Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -17- India Cement Ltd.'s case (supra) held that for the purpose of Section 43B(a) royalty is a tax and, therefore, unpaid royalty for extraction or limestone cannot be deducted on the basis of a mere provision. The deduction would be permissible in the year of payment. Later on a Constitution Bench of the Hon'ble Supreme Court had the occasion to consider the issue in Kesoram Industries Ltd's case (supra), wherein it was held as under:-
"We Would like to avail this opportunity for pointing out an error, attributable either to a stenographer's devil or to sheer inadvertence, having crept into the majority judgment in India Cement Ltd.'s case (supra). The error is apparent and only needs a careful reading to detect. We feel constrained - rather duty-bound - to say so, lest a reading of the judgment containing such an error - just an error of one word - should continue to cause the likely embarrassment and have adverse effect on the subsequent judicial pronouncements which would follow India Cement Ltd.'s case, feeling bound and rightly, by the said judgment having the force of pronouncement by seven-Judges Bench. Para 34 of the report reads as under :
"In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State legislature because Section 9 of the Central Act covers the field and the State legislature is denuded of its competence Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -18- under Entry 23 of List II. In any event, we are of the opinion that cess on royalty cannot be sustained under Entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land."
20. It was further held as under:-
"In India Cement (vide para 31 [1990] 1 SCC 12) decisions of four High Courts holding 'Royalty is not tax' have been noted without any adverse comment. Rather, the view seems to have been noted with tacit approval. Earlier (vide para 21 [1990] 1 SCC 12) the connotative meaning of royalty being 'share in the produce of land' has been noted. But for the first sentence (in para 34 [1990] 1 SCC 12 ) which we find to be an apparent error, no where else has the majority judgment held royalty to be a tax."
How the abovenoted inadvertent error in India Cement has resulted into throwing on the loop line the movement of later case law on this point may be noticed. In State of M.P. v. Mahalaxmi Fabric Mills Ltd. and others 1995 Suppl. (1) SCC 642 (decision by a Bench of three learned Judges) and Saurashtra Cement and Chemicals Industries and Anr. etc. etc. v. Union of India and Ors. - (2001) 1 SCC 91 (decision by a Bench of two learned Judges) para 34 (from SCC) in India Cement has been quoted verbatim and dealt with. In Mahalaxmi Fabric Mills Ltd. and Ors.'s case (supra), the court noticed several dictionaries defining royalty and also the decisions of High Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -19- Courts available and stated that traditionally speaking royalty is an amount which is paid under contract of lease by the lessee to the lessor, namely, the State Governments concerned and it is commensurate with the quality of minerals extracted. But then (vide para 12), the Court felt bound by the view taken in India Cement , reiterated in Orissa Cement, to hold that royalty is a tax. The point that there was apparently a 'typographical error' in para 34 in India Cement was specifically raised but was rejected. In Saurashtra Cement and Chemicals Industries and Anr. (supra) too the Court felt itself bound by the decision in Mahalaxmi Fabric Mills Ltd. and Ors. (supra), backed by India Cement, and therefore held royalty to be tax.
We have clearly pointed out the said error, as we are fully convinced in that regard and feel ourselves obliged constitutionally, legally and morally to do so, lest the said error should cause any further harm to the trend of jurisprudential thought centering around the meaning of 'royalty'. We hold that royalty is not tax. Royalty is paid to the owner of land who may be a private person and may not necessarily be State. A private person owning the land is entitled to charge royalty but not tax. The lessor receives royalty as his income and for the lessee the royalty paid is an expenditure incurred. Royalty cannot be tax. We declare that even in India Cement it was not the finding of the Court that royalty is a tax. A statement caused by an apparent typographical or inadvertent error in a judgment of the Court Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -20- should not be misunderstood as declaration of such law by the Court. We also record, our express dissent with that part of the judgment in Mahalaxmi Fabric Mills Ltd. and Ors. which says (vide para 12 of SSC report) that there was no 'typographical error' in India Cement and that the said conclusion that royalty is a tax logically flew from the earlier paragraphs of the judgment."
21. It is evident from the latter Constitution Bench decision of the Hon'ble Supreme Court in Kesoram Industries' case (supra) that the royalty is not a tax.
22. Drawing a distinction between "royalty and "tax", a Division Bench of the High Court of Punjab and Haryana in Dr. Shanti Saroop Sharma v. State of Punjab, AIR 1969 P&H 79, in para 45 held as under:-
" 45.....So, if a person is merely in occupation of land which contains minor minerals, he is not liable to pay any royalty , but it is only when he holds a mining lease and by virtue of that extracts one or more minor minerals that he is called upon to pay royalty to the Government where the lease is in respect of the land in which minor minerals vest in the Government. Royalty thus has its basis in the contract between the grantor and the holder of a mining lease, and it is not a compulsory charge for holding such lease but payment to the owner of the minerals for the privilege of extracting the minor minerals computed on the basis of the quantity actually extracted and removed from the leased area. Accordingly royalty is not of the same nature as a tax or a fee. It is true that it is not a fee as it is not payment for Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -21- the services rendered, but if we exclude it from that category, it does not follow that it must be classed as tax. It is in essence the consideration which the owner of a property may receive from those whom he allows the use of his property for exploitation of the mineral resources contained therein. In that view of the matter, it is more akin to rent or compensation payable to an owner by the occupier or lessee of land for its use or exploitation of the resources contained therein. Merely because the provision with regard to royalty is made by virtue of the rules relating to the regulation of the mining leases and a uniform rate is prescribed. It does not follow that it is a compulsory exaction in the nature of tax or impost."
23. Following the aforesaid decision of this Court in Dr. Shanti Saroop Sharma's case (supra), the Division Bench of the Gujarat High Court in Saurashtra Cement and Chemical Industries Limited v. Union of India, AIR 1979 Guj 180 has emphatically laid down:
"royalty may not be a fee but it is not a tax. S.9 itself elaborates the nature of royalty which can be levied. It, inter alia, provides that the holder of a mining lease shall pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub lessee from the leased area. This elaboration in Section 9 itself clearly shows that royalty is a payment for the mineral which is removed or consumed by the holder of a mining lease. The sub soil property ordinarily belongs to the Union. When mining lease is granted in favour of a person, he wins minerals from a particular area by Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -22- application of labour and by spending on winning the minerals. The minerals themselves - the property beneath the soil - belong to the Union. When the holder of a mining lease removes these minerals or consumes them, he can do so only on payment of its price or value. Therefore, expression "royalty" used in section 9 appears to us to be a share which the Union claims in the minerals which have been won from the soil by the lessee and which otherwise belong to it. No holder of a mining lease can say that what it lying beneath the soil becomes his own property merely by virtue of the fact that because of mining lease, he has won those minerals. Basically and fundamentally it is the property of the Union which is brought on the surface from beneath the soil by the lessee. In consideration of the labour and the enterprise which the holder of a mining lease applies for winning those minerals from sub soil strata, he takes away a part; while the Union, the owner of those minerals, takes away another part. Therefore, in our opinion, royalty is a share in such minerals and not a tax in the form of a compulsory exaction. It is not compulsory because anyone who applies for a mining lease to win minerals for being removed or consumed must pay its price. If he does not want to pay the price, he may not apply for a mining lease. Clause (28) of Article 366 defines the expression "taxation" so as to include imposition of any tax or impost, whether general or local or special, and states that "tax" shall be construed accordingly. Royalty which is a share of the owner of the minerals - the Union - won by the lessee from the soil with the authority of the Union can never be said to be an imposition on the holder of a mining lease. In Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -23- Dr. Shanti Saroop Sharma v.State of Punjab, AIR 1969 Punjab and Haryana 79, the question as to the true nature and character of royalty arose in the context of this very Act and in the context of R.20 of Punjab Minor Mineral Concession Rules. The view which the Punjab High Court has taken in this behalf is that royalty is neither a tax nor a fee but is more akin to rent. In that decision, several definitions of royalty have been examined by the Punjab High Court. In Wharton's Law Lexicon, Fourteenth Edition, royalty is stated to be payment to the owner of minerals for the right of working the same on every ton or other weight raised. In Stroud's Judicial Dictionary of Words and Phrases, Third Edition, it has been stated to be the reddendum, which is variable and which depends upon the quantity of minerals gotten. In Mozley and Whiteley's Law Dictionary (7th Edition), it has been stated:-
"A pro rata payment to a grantor or lessor on the working of the property leased or otherwise on the profits of the grant or lease".
In Corpus Juris Secundum, Vol.77, "Royalty" has been stated to be a payment made to the landowner by the lessee of a mine in return for the privilege of working it. It is, therefore, clear that royalty is the price paid for the privilege of exercising the right to explore the minerals. It may be the whole or a part of the consideration of a mining lease. In our opinion, therefore, royalty specified in S.9 is neither a tax nor a fee but is a payment made by the lessee to the lessor (in case of mining lease) for removing or consuming the sub soil property which the lessee has won by the application of his labour and enterprise..." Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -24-
24. For determining the nature of payment made by the assessee-Corporation to the Forest Department, it would be apposite to examine various constitutional and statutory provisions to which reference has been made by learned counsel for the parties during the course of arguments.
25. Article 366(28) of the Constitution of India defines "taxation" to mean any tax or impost, whether general or local or special. 'Impost' is a compulsory levy. Article 298 confers power on the Union and the State to carry on any trade or business and to enter into business contracts during the course of such trade or business. Further, the reference made by the parties to entry No.17A read with entries 43 and 47 of Concurrent List III of 7th Schedule is only relevant to understand the field of legislation covered under the 1927 Act, but it cannot be understood as authorizing levy of a fee in the nature of a tax imposed by the State.
26. Referring to the statutory provisions of the 1927 Act, on which reliance had been placed by learned counsel for the revenue, the relevant provisions may be noticed:-
Preamble "An Act to consolidate the law relating to forests, the transit of forest produce and the duty leviable on timber and other forest produce."
Section 32:
"32. Power to make rules for protected forests.The Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -25- State Government may make rules to regulate the following matters, namely:
(a) the cutting, sawing, conversion and removal of trees and timber, and the collection, manufacture and removal of forest-produce, from protected forests;
(b) the granting of licences to the inhabitants of towns and villages in the vicinity of protected forests to take trees, timber or other forest-produce for their own use, and the production and return of such licences by such persons;
(c) the granting of licences to persons felling or removing trees or timber or other forest-produce from such forests for the purposes of trade, and the production
d) the payments, if any, to be made by the persons mentioned in clauses (b) and (c) for permission to cut such trees, or to collect and remove such timber or other forest-produce;
(e) the other payments, if any, to be made by them in respect of such trees, timber and produce, and the places where such payment shall be made;
(f) the examination of forest-produce passing out of such forests;
(g) the clearing and breaking up of land for cultivation or other purposes in such forests;
(h) the protection from fire of timber lying in such forests and of trees reserved under section 30;
(i) the cutting of grass and pasturing of cattle in such forests;
(j) hunting, shooting, fishing, poisoning water and setting traps or snares in such forests and the killing or catching of elephants in such forests in areas in which the Elephants Preservation Act, 1879 (6 of 1879), is not Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -26- in force;
(k) the protection and management of any portion of a forest closed under section 30; and
(l) the exercise of rights referred to in section 29."
None of the aforesaid power to make rule can be read as charging section for levy of any tax or fee or cess or duty by the State Legislature. Section 39 of the 1927 Act empowers the Central Government to impose duty on timber and other forest produce. It reads thus:-
"39. Power to impose duty on timber and other forest- produce.
(1) The Central Government may levy a duty in such manner, at such places and at such rates as it may declare by notification in the Official Gazette on all timber or other forest- produce--
(a) which is produced in the territories to which this Act extends, and in respect of which the Government has any right;
(b) which is brought from any place outside the territories to which this Act extends: (2) In every case in which such duty is directed to be levied ad valorem, the Central Government may fix by like notification the value on which such duty shall be assessed.
(3) All duties on timber or other forest- produce which, at the time when this Act comes into force in any territory, are levied therein under the authority of the State Government, shall be deemed to be and to have been duly levied under the provisions of this Act.
(4) Notwithstanding anything in this section, the Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -27- State Government may, until provision to he contrary is made by Parliament, continue to levy any duty which it was lawfully levying before the commencement of the Constitution, under this section as then in force: Provided that nothing in this sub- section authorizes the levy of any duty which as between timber or other forest- produce of the State and similar produce of the locality outside the State discriminates in favour of the former, or which, in the case of timber or other forest- produce of localities outside the State, discriminates between timber or other forest- produce of one locality and similar timber or other forest- produce of another locality."
Section 40 deals with non-application of limit of amount chargeable as purchase money or royalty on any timber or other forest produce, which reads as under:-
40. Limit not to apply to purchase-money or royalty.-Nothing in this Chapter shall be deemed to limit the amount, if any, chargeable as purchase-
money or royalty on any timber or other forest- produce, although the same is levied on such timber or produce while in transit, in the same manner as duty is levied.
Section 50 provides for payments to be made by claimant before timber is delivered to him in the following terms:-
"50. Payments to be made by claimant before timber is delivered to him - No person shall be entitled to recover possession of any timber collected or delivered as aforesaid until he has paid to the Forest- officer or other person entitled to receive it such sum on account thereof as may be Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -28- due under any rule made under section 51."
Section 82 of the 1927 Act relates to 'Recovery of Money due to Government', as under:-
"82. Recovery of money due to Government - All money payable to the Government under this Act, or under any rule made under this Act, or on account of the price of any forest- produce, or of expenses incurred in the execution of this Act in respect of such produce, may, if not paid when due, be recovered under the law for the time being in force as if it were an arrear of land- revenue."
A combined reading of these provisions shows that they do not confer any power on the State Government to levy tax or fee or cess or duty. In so far power under Section 82 of the 1927 Act is concerned, it only authorises to enforce recovery and cannot be construed as conferring power on State Government to levy tax or fee or cess or duty in relation to forest produce. It is well recognized legal principle that power to tax has to specifically emanate from a charging section and there cannot be any tax by drawing inference or by implication. An amount paid by the assessee as a consideration for something be it mineral rights or bottling fee for right to bottle liquor which is vested in the State government or cutting of standing timber cannot fall within the ambit of tax, duty, cess or fee even though it may have a statutory origin.
27. Consideration for severing standing trees/timber under a contract falls within the term 'sale' under the provisions of Sale Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -29- of Goods Act, 1930 as held by Hon'ble the Supreme Court in Champalal Kishanlal Mohota's case (supra), in the following terms:-
"4. The expression "sale of goods" in Entry 54 List 11 of Sch. VII of the Constitution has the same connotation as it has in the Sale of Goods Act, 1930. This Court in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.(1959) SCR 379 = (AIR 1958 SC 560) observed that the expression "sale of goods" was, at the time when the Government Of India Act, 1935, was enacted, a term of well-recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic and must be interpreted in Entry 48 in List 11 in Sch. VII of the Act as having the same meaning as in the Sale of Goods Act, 1930 : see also Pandit Banarsi Das Bhanot v. The State of Madhya Pradesh, 1959 SCR 427 = (AIR 1958 SC 909). The expression " sale of goods" in Entry 54 in List II of Sch. VII of the Constitution has also the same meaning as that expression had in Entry 48 in List II of the Government of India Act, 1935. The State Legislature may not therefore extend the import of the expression " sale of goods" so as to impose, liability for tax on transactions which are not sales of goods within the meaning of the Sale of Goods Act.
5. By Art. 366(12) of the Constitution the expression "goods" is defined as inclusive of "all materials, commodities and articles". That is, however an inclusive definition and does not Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -30- throw much light on the meaning of the expression "goods". But the definition of "goods"
in the Sale of Goods Act, 1930, as meaning "every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale". Standing timber may ordinarily not be regarded as "goods", but by the, inclusive definition given in s. 2(7) of the Sale of Goods Act things which are attached to the land may be the subject- matter of contract of sale provided that under the terms of the contract they are to be severed before sale or under the contract of sale.
6. In the present case it was expressly provided that the timber agreed to be sold shall be severed under the contract of sale. The timber was therefore "goods" within the meaning of s. 2 (7) of the Sale of Goods Act and the expression "sale of goods" in the Constitution in Entry 54 List 11 having the same meaning as that expression has in the Sale of Goods Act, sale of timber agreed to be severed under the terms of the contract may be regarded as sale of goods."
28. The distinction between tax and fee was explained by the Hon'ble Apex Court in Om Parkash Aggarwal's case (supra). It was noticed that a tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered. It was held as under:-
"This definition brings out in our opinion, the Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -31- essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law. The second characteristic of tax is that it is imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said no element of quid pro quo between the tax-payer and the public authority. Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the tax- payer depends generally upon his capacity to pay."
The three principal characteristics of a tax noticed by Mukherjea, J. in the above passage are:
(i) that it is imposed under statutory power without the tax-payer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is a part of the common burden, the quantum of imposition upon the tax-
payer depending generally upon the capacity of the tax payer to pay."
Singh Gurbax2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -32-
29. Further, defining the scope of "fees", it was observed as follows:-
"Coming now to fees, a "fee" is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be various kinds of fees, it is not possible to formulate a definition that would be applicable to all cases. ........
If, as we hold, a fee is regarded as a sort of return or consideration for services rendered, it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by government in rendering the services."
30. Having noticed the legal position, we now proceed to examine the factual matrix herein. According to the learned counsel for the assessee, the following procedure has been laid out for transfer of trees by the Forest department to the assessee
- Corporation:-
"i). The Divisional Forest Officer of the Forest Department offers the marking lists of the trees to be cut to the concerned Divisional Manager of the Punjab State Forest Dev. Corporation Limited. The marking Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -33- list inter alia shows the location of trees, species, number of trees, volume of trees etc.
ii) On the basis of the above referred letter the officials of the Corporation take into possession the trees so transferred and a statement on the possession receipt is prepared specifying therein the details of the species of the trees transferred no. of trees transferred and the volume of trees transferred, location etc. This possession receipt is jointly signed by the officials of both the forest Department and the Corporation.
iii) A quarterly statement called the 'joint Royalty Statement' is prepared and signed by the officers of both the forest Department and the corporation. A joint royalty statement reflects the description of the trees transferred to the corporation during the quarter reflecting therein the location of trees, no. of trees and the volume of trees, species etc. The corporation pays royalty on the basis of joint royalty statement after applying royalty rates fixed by the State Govt. after consultation with the officers of the corporation.
iv) As per the terms and conditions fixed by the State Government for payment of royalty the corporation pays royalty within seven months from the date of the offer of the trees. The payment is made on the basis of the volume of wood and no. of trees included in the joint royalty statements."
The assessee-Corporation had obtained permission to severe standing trees from the Forest Department against consideration to be paid to the Government. It is only the State Government which has given the nomenclature to the cost of trees as Royalty. The royalty is the cost of trees sold by the Punjab Government to Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -34- the assessee - Corporation for cutting and selling after processing the same. The specific number, location, species and volume of trees are marked by Forest department which are grown by them for felling by the assessee. The assessee cannot exceed such number allotted to it. It is primarily the price to be paid by the assessee to the State Government for severing the grown trees. In this process, the State Government exercises its executive power to carry on trade or business and does not impose any tax or fee or cess or duty. The nature of payment by the assessee would fall as sale consideration. Alternatively, even as per nomenclature by the State if it is taken to be royalty, yet in that situation also, it cannot be said to fall within the expression "tax, duty, cess or fee or by whatever name called" under Section 43B(a) of the Act. In other words, the payment accrues or arises by virtue of contractual obligation of the assessee and not as a result of any statutory impost.
31. Adverting to the judgments relied upon by learned counsel for the revenue, suffice it to notice that they do not help her case as these judgments were either prior to the judgment in Kesoram Industries Ltd.'s case (supra) or the Hon'ble Court had adjudicated the issue following judgment of the Apex Court in India Cement's case (supra) without considering the impact of Kesoram Industries Limited's case (supra) on the factual matrix involved therein.
32. In view of the above, it is concluded that the amount in Singh Gurbax 2014.02.28 15:35 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 442 of 2009 -35- question does not satisfy the test of being fee, duty, cess or tax or by whatever name called and thus, does not fall within the provisions of Section 43B(a) of the Act.
33. Accordingly, we do not find that there was any error in the approach adopted by the Tribunal. Thus, the substantial questions of law are answered against the revenue and in favour of the assessee. The appeals stand dismissed.
(AJAY KUMAR MITTAL)
JUDGE
October 04, 2013 (JASPAL SINGH)
gbs/gs JUDGE
Singh Gurbax
2014.02.28 15:35
I attest to the accuracy and
integrity of this document
High Court Chandigarh