Commissioner of Income Tax vs Kharaiti Lal and Co.

S.S. Sodhi, J.—The controversy here concerns the amount collected as royalty on the sale of bricks by the assessee, a partnership firm, carrying on business of manufacture and sale of bricks, the assessment year in question being 1972-73.

It was during the three earlier assessment years, namely, 1967-68, 1968-69 and 1969-70 that Rs. 1,075, Rs. 2,879 and Rs. 7,472, respectively, were received by the assessee as royalty, the total amount collected during these three years being Rs. 12,697.

The amounts collected as royalty were shown under a separate and distinct head in the balance-sheet, but they were neither treated as a trading receipt nor was any deduction claimed in respect of them.

On March 25, 1971, a Full Bench of our court in Amar Singh Modi Lal Vs. State of Haryana and Others, , held that no royalty was chargeable on the sale of bricks. The question thus arose with regard to this amount of Rs. 12,697 collected as royalty by the assessee. The Income Tax Officer included this sum in the income of the assessee for the assessment year 1972-73. This was upheld in appeal by the Appellate Assistant Commissioner. The Tribunal, however, took a contrary view and deleted this amount from the income of the assessee. This is what led to the following question being referred for the opinion of this court, namely :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 12,697 from the assessment for the assessment year 1972-73 ?"

The Tribunal, in holding in favour of the assessee, accepted the plea that the provisions of Section 41(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), were not applicable in this case. This view clearly has the support of the judgment of the High Court of Calcutta in Commissioner of Income Tax Vs. M. Nath, , where it was held that Section 41(1) of the Act would apply only if, --

(i) an allowance or deduction had been made in the computation of profits and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and ;

(ii) subsequently, during any previous year, the assessee had obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof.

As regards the impugned receipt of Rs. 12,697 forming part of the trading receipts of the assessee, the contention of counsel for the Commissioner of Income Tax was that once it was held by the High Court that no royalty was chargeable on the sale of bricks, the amount collected as royalty must be deemed to be income in the hands of the assessee with effect from the date of the judgment of the High Court, that is, March 25, 1971, and consequently, this income fell to be included in the income of the assessee for the assessment year 1972-73. Reliance in this behalf was placed upon Motilal Ambaidas v. CIT [1977] 108 ITR 136 . The matter there pertained to the refund of a levy of sales tax to the extent of Rs. 42,263. The Supreme Court, by its judgment of January 20, 1964, held the particular levy of sales tax to be unconstitutional and as a result, the amount of the refund, namely, Rs. 42,263, was credited in the books of account of the assessee, who followed the mercantile system of accounting in Samvat year 2020, corresponding to the assessment year 1965-66. In point of fact, it was only a sum of Rs. 34,490 which was actually received by Samvat year 2020 while the balance amount of Rs. 7,773 was received in Samvat year 2021. It was held that as the assessee was maintaining its accounts on mercantile basis, it was, therefore, the date of accrual of the right to receive the amount that was material and not the date of actual payment by Government to the assessee. The decision of the Supreme Court of January 20, 1964, which fell in Samvat year 2020 finally decided the question of accrual of the right to receive the amount of sales tax. In view of Section 41(1), therefore, it was the previous year in which the right to receive the amount of Rs. 42,263 by way of refund accrued to the assessee and it was the assessment year 1965-66 relevant to the previous Samvat, year 2020 in which the refund could be brought to tax.

The present case is clearly distinguishable from Motilal Ambaidas'' case [1977] 108 ITR 136, inasmuch as the case here is of actual payment of the amounts in question in the earlier year.

Such being the situation here, the Tribunal, therefore, rightly deleted the addition of the said sum of Rs. 12,697 from the income of the assessee for the assessment year 1972-73. This reference is accordingly answered in the affirmative, in favour of the assessee and against the Revenue. There will, however, be no order as to costs.

Gokal Chand Mital, J.

I entirely agree with the conclusions arrived at by my brother, S. S. Sodhi, but I would like to add my own reasons. As the facts show, no allowance or deduction was claimed in the three respective years ; no allowance or deduction was allowed by the Income Tax Officer while making the assessment pertaining to those years. The question arises as to whether Section 41(1) of the Act would be applicable. In Amar Singh Modi Lal Vs. State of Haryana and Others, , this court held that no royalty was chargeable on the sale of bricks. According to the decided cases referred to by my brother, S. S. Sodhi, Section 41(1) of the Act is attracted only when deduction is claimed and allowed. To overcome the difficulty, the argument raised by counsel for the Revenue was that it should be deemed that indirectly allowance or deduction was allowed and Section 41(1) of the Act should be applied. There is no dispute that the amount of royalty collected would be deemed to be the income in the hands of the assessee, but not on the date when the judgment was rendered in Amar Singh Modi Lal Vs. State of Haryana and Others, , but when the same was obtained during the three respective years. If allowance or deduction had been allowed earlier on the decision of Amar Singh Modi Lal Vs. State of Haryana and Others, , the amount could be added in the income of the assessee in the accounting year in which judgment was given. There is no method of allowing allowance or deduction in an indirect way as is suggested by counsel for the Revenue, nor has any judgment been cited. Since no allowance or deduction was allowed while making the assessments relating to the three years in which the royalty was collected, Section 41(1) of the Act would not be attracted. Therefore, in the year in which the judgment was rendered in Amar Singh Modi Lal Vs. State of Haryana and Others, , the total royalty amount could not be added in the income of the assessee. On these premises, the referred question is answered in favour of the assessee and in the affirmative.