High Court allows royalty deduction as revenue expenditure and rejects disallowance of unpaid sales-tax liability.

The High Court ruled in favor of the assessee on both issues. The deduction of royalty payment as revenue expenditure was allowed, considering it akin to a license fee. Additionally, the disallowance of unpaid sales-tax liability under section 43B was rejected, following the Supreme Court decision that if the liability is paid before the due date of filing the income tax return, it cannot be disallowed. The reference was disposed of with no order as to costs.

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Issues involved:
1. Deduction of royalty payment as revenue expenditure.
2. Disallowance of unpaid sales-tax liability under section 43B.

Analysis:
1. The case involved the deduction of royalty payment as revenue expenditure for the assessment years 1982-83 to 1984-85. The assessee claimed the deduction based on an agreement with Enertom Systems, which the AO treated as capital expenditure. The CIT(A) confirmed the disallowance, considering the payment as an outright purchase of technical know-how. However, the Tribunal accepted the submission that the royalty payment was akin to a license fee and hence a revenue expenditure. The Tribunal's decision was based on the understanding that the royalty was payable for a certain period as long as the assessee could use the technical know-how.

2. The second issue pertained to the disallowance of unpaid sales-tax liability under section 43B of the IT Act. The question raised was whether the disallowance could be made if the unpaid sales-tax liability was paid before the due date of filing the return under section 139(1), despite the insertion of the first proviso to section 43B w.e.f. 1st April, 1988. The standing counsel for the Revenue argued that the issue was settled in favor of the assessee by the Supreme Court decision in Allied Motors (P) Ltd. vs. CIT. The Court held that if the unpaid sales-tax liability is paid before the due date of filing the return of income-tax under section 139(1), it cannot be disallowed under section 43B of the Act.

In conclusion, the High Court held in favor of the assessee on both issues. The deduction of royalty payment as revenue expenditure was allowed, and the disallowance of unpaid sales-tax liability under section 43B was rejected based on the precedent set by the Supreme Court decision. The reference was disposed of with no order as to costs.

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