1991 (4) TMI 185 - AT - Income Tax

Contractual vs. Statutory Royalty Payment Liability: Key Ruling on Deductions

The case involved determining whether the liability for payment of royalty was contractual or statutory. The Tribunal concluded it was contractual based ... Business Expenditure Issues Involved:1. Whether the liability for payment of royalty as per the agreement with the Government of Andhra Pradesh is contractual or statutory in nature.2. If it is contractual, does it make any difference if the assessee had, before the revision of the rates, given an undertaking to pay whatever may be the new rate fixed and communicated to the assessee-companyRs.3. Whether on the facts and in the circumstances of the case, the assessee is entitled to the deduction of the additional royalty claimed although the assessee-company had disputed it and a writ petition is pending before the High Court.Detailed Analysis:Issue 1: Nature of Liability for Payment of RoyaltyThe Tribunal examined whether the liability for payment of royalty as per the agreement with the Government of Andhra Pradesh is contractual or statutory. The agreement dated 20-7-1977 provided for the revision of royalty rates every five years. The revised rates of royalty were fixed by G.O. No. 538 dated 4-11-1981. The Tribunal concluded that the liability to pay the revised rates of royalty arose out of the contract dated 20-7-1977 and not from any statutory provision. The Andhra Pradesh High Court in the case of Shri Rayalaseema Paper Mills Ltd. v. Govt. of A.P. [1990] 1 APLJ 137 supported this view by stating that the determination of royalty rates for produce supplied to paper mills is not governed by any statute or statutory order.Issue 2: Impact of Assessee's Undertaking on Accrued LiabilityThe Tribunal considered whether the undertaking given by the assessee to pay the revised rates of royalty before the revision of the rates made any difference. The assessee had given an undertaking on 14-2-1981 to pay the revised rates of royalty from 1-10-1980. The Tribunal held that this undertaking imported a liability on the assessee, resulting in the accrual of liability with regard to the revised rates of royalty. The liability accrued when the assessee felled and collected the bamboos and hardwoods, both events occurring before the end of the accounting year on 30-6-1981. The Tribunal cited the Supreme Court's decision in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) to support the view that an undertaking imports a liability that accrues even if the quantification of the liability is deferred.Issue 3: Entitlement to Deduction of Additional RoyaltyThe Tribunal addressed whether the assessee is entitled to the deduction of the additional royalty claimed, despite the dispute and pending writ petition. The Tribunal referred to the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, which established that a liability accrues the moment a sale or purchase takes place, and the liability does not cease to be a liability merely because it is disputed or not quantified. The Tribunal concluded that the liability to pay the revised rates of royalty accrued during the accounting year relevant to the assessment year 1982-83, and the assessee was entitled to claim a deduction for the same. The Tribunal distinguished the case from Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524, where the right to receive enhanced compensation was in dispute, stating that in the present case, the dispute was only about the quantification of the liability, not the right to revise the rates.Separate Judgment by K.S. Viswanathan, Vice President:K.S. Viswanathan, Vice President, delivered a separate judgment disagreeing with the majority view. He agreed that the liability is contractual but opined that the deduction should be allowed only when the assessee accepts the liability. He cited several authorities supporting the view that a contractual liability cannot be enforced and allowed as a deduction until accepted by the assessee. Despite his dissent, the departmental appeal was dismissed based on the majority decision.Conclusion:1. The liability for payment of royalty is contractual.2. The undertaking given by the assessee, coupled with its felling and collecting the bamboos, resulted in creating an accrued liability for the assessee with regard to the enhanced rates of royalty.3. The assessee is entitled to the deduction of additional royalty claimed, particularly when the writ appeal of the assessee has been dismissed.The appeal by the Revenue was dismissed.