1981 (2) TMI 13 - HC - Income Tax

Court rules taxability of royalty based on nature of receipt, not accounting treatment

The Supreme Court dismissed the application regarding the taxability of royalty collected by an assessee-firm, affirming that the nature of the receipt, ... Brick Kiln Issues:1. Taxability of royalty collected by the assessee-firm as part of total income.2. Inclusion of royalty collected in the total income for the assessment year 1971-72.Analysis:The judgment pertains to an assessment year where an assessee-firm engaged in the business of brick-kiln collected royalty amounts from customers. The firm did not pay this royalty to the Government due to a court decision declaring it not payable in the absence of a mining lease agreement. The Income Tax Officer (ITO) added the royalty amount to the firm's total income, leading to appeals before the Appellate Assistant Commissioner (AAC) and the Tribunal. The Tribunal rejected the application under s. 256(1) of the I.T. Act, as the assessee had conceded that the amounts constituted income receipts. Subsequently, the assessee filed another application under s. 256(2) seeking a mandamus to refer the question of inclusion of royalty in total income for the assessment year 1971-72. The Tribunal observed that the matter was settled by the Supreme Court in a similar case, where it was held that the true nature of the receipt determines its taxability, regardless of how it is recorded in account books.The Supreme Court's decision in Chowringhee Sales Bureau P. Ltd's case is cited, where the court held that amounts collected, even if not paid to the appropriate authority, form part of trading or business receipts. The court emphasized that the true nature of the receipt, not its accounting treatment, is crucial in determining taxability. Drawing parallels between the present case and the Supreme Court precedent, the court dismissed the petition for mandamus, stating that the matter was conclusively settled by the earlier decision. The court agreed with the Revenue's counsel that the royalty collected by the assessee-firm should be treated as part of its income, in line with the principles established by the Supreme Court.In conclusion, the court dismissed the application, citing the precedent set by the Supreme Court regarding the taxability of receipts collected by a business entity. The court emphasized that the nature of the receipt, whether as royalty or sales tax, determines its treatment for tax purposes, irrespective of how it is accounted for in the books. The judgment underscores the importance of the true economic substance of transactions in assessing tax liability, as established by judicial precedents.