1972 (9) TMI 12 - SC - Income Tax

Supreme Court ruling on deductibility of payments for monopoly rights and royalties in sugar manufacturing

The Supreme Court partially allowed the appeal in a case concerning the deductibility of payments made for monopoly rights and royalty payments to the ... Sugar factory - on the facts and circumstances of this case, the expenditure incurred, i.e., 2% royalty on the sugar manufactured, is revenue expenditure. Our answer to the question, therefore, is that the two payments in respect of the monopoly rights for the years 1950-51 and 1952-53 are of capital nature while those paid for royalty for the three assessment years under consideration are of a revenue nature deductible under section 10(2) (xv) Issues Involved:1. Deductibility of payments made for monopoly rights.2. Deductibility of royalty payments to the State Government on the price of sugar manufactured.Issue-wise Detailed Analysis:1. Deductibility of payments made for monopoly rights:The appellant, a public company, was assessed for the years 1950-51, 1951-52, and 1952-53. The appellant carried on the business of selling sugar and oil, having started sugar manufacturing in 1940 and oil in 1942. The Maharana of Udaipur State granted a monopoly license for sugar manufacturing to Banarsi Prasad Jhunjhunwala in 1932, which was later transferred to the appellant. The appellant paid certain amounts to Jhunjhunwala and Malaviya in lieu of the monopoly rights and licenses at the stipulated amount of 1 1/4 percent of the net profits.The Income-tax Officer disallowed these payments as deductible expenses, categorizing them as capital expenditure. The Appellate Assistant Commissioner and the Tribunal upheld this decision. The High Court also ruled against the assessee, stating that the payments made for monopoly rights were not allowable deductions under section 10(1) or section 10(2)(xv) of the Income-tax Act, 1922.The Supreme Court noted that the appellant's advocate did not press the question regarding the disallowance of payments made for monopoly rights, thereby leaving the High Court's decision on this issue uncontested. Consequently, the payments made for monopoly rights were deemed capital expenditure and not deductible.2. Deductibility of royalty payments to the State Government on the price of sugar manufactured:The appellant also paid royalties to the State Government on the sale of sugar and oil. The High Court ruled that the royalties paid for oil were deductible, but those paid for sugar were not, considering them as capital expenditure.The Supreme Court examined whether the High Court's finding that the 2% royalty on sugar was related to monopoly rights and thus capital expenditure was sustainable. The Court observed that clause (5) of the grant allowed for a revision of the 2% rate if it was found excessive after five years, indicating no direct relationship with the monopoly rights under clause (2).The Court emphasized that the advantages granted under clauses (3) and (4) of the grant were typical of incentives provided by progressive governments to encourage nascent industries. The High Court's interpretation of the grant and agreement was found to be flawed, as it confused the principles for determining capital and revenue expenditure.The Supreme Court referred to several precedents, including Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and Gotan Lime Syndicate v. Commissioner of Income-tax, to elucidate the distinction between capital and revenue expenditure. The Court concluded that the 2% royalty on sugar was directly related to the quantity of sugar manufactured and was therefore a revenue expenditure.The Supreme Court held that the royalties paid for the years 1950-51, 1951-52, and 1952-53 were deductible under section 10(2)(xv) of the Act. Consequently, the appeal was partly allowed, with the payments for monopoly rights being capital expenditure and the royalties on sugar being revenue expenditure eligible for deduction. The appeal was partly allowed with costs.Appeal partly allowed.