Excess royalty as revenue expenditure: contractual payment deductible where no tax liability existed and no capital asset was acquired.

Excess royalty payable under a contract was treated as deductible business expenditure because it arose from commercial expediency and did not secure any capital asset or enduring advantage. The recital that the payment was made in lieu of income-tax, super-tax and excess profits tax did not justify disallowance, since no such tax liability existed in the relevant State during the material period. The payment was therefore not hit by the tax-exclusion provision and remained revenue in nature, comparable to minimum royalty. The excess royalty was held deductible in computing business income, and the disallowance was unsustainable.

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Issues: Whether the excess royalty paid by the assessee under the agreement was deductible in computing business income, or was disallowed either as capital expenditure or because it was paid in lieu of income-tax, super-tax and excess profits tax.

Analysis: The excess royalty was payable under the contract itself. There was no income-tax, super-tax or excess profits tax law in force in the relevant State during the material period, so the payment could not in substance be said to have been made in lieu of those taxes, notwithstanding the recital in the agreement. The payment did not secure any capital asset or enduring advantage and was of the same nature as the minimum royalty. It was incurred on grounds of commercial expediency and fell within the permissible revenue deduction provision.

Conclusion: The excess royalty was deductible and section 10(4) did not apply; the disallowance was unsustainable and the answer was in favour of the assessee.

Ratio Decidendi: A contractual payment described as being in lieu of taxes is not disallowable under the tax-exclusion provision where no such tax liability existed in the relevant jurisdiction, and a royalty payment incurred on commercial expediency without acquisition of a capital asset is a deductible revenue expenditure.

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