Royalty treated as tax-like exaction, making unpaid royalty disallowable until actual payment under income tax law

Royalty was treated as a tax-like compulsory exaction for purposes of section 43B of the Income-tax Act, 1961, following the settled understanding drawn from India Cement Ltd. and later decisions. On that basis, unpaid royalty liability fell within the statutory bar and was not deductible until actually paid. The reference was answered in favour of the Revenue and against the assessee.

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Issues: Whether royalty is in the nature of tax, duty, cess or fee for the purposes of section 43B of the Income-tax Act, 1961, and whether unpaid royalty liability is disallowable under that provision.

Analysis: The reference turned on the character of royalty for purposes of section 43B. The earlier view of the Tribunal that royalty was consideration for goods or services and therefore outside the scope of tax, duty, cess or fee was found inconsistent with the settled law. The decision of the Supreme Court in India Cement Ltd. and the decisions following it were treated as laying down that royalty is a tax and that a liability towards unpaid royalty falls within the ambit of section 43B.

Conclusion: Royalty is covered by section 43B as a tax-like exaction, and unpaid royalty liability is not deductible until actually paid. The question was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: Royalty is a tax-like compulsory exaction and unpaid royalty liability is subject to section 43B of the Income-tax Act, 1961.

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