COMMISSIONER OF INCOME-TAX VS ASIA MATCH CO. (P.) LTD
1999 P T D 691
[225 I T R 247]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
Versus
ASIA MATCH CO. (P.) LTD
Tax Case No.902 (Reference No.467 of 1983), decided on 12/03/1996.
(a) Income-tax---
----Company---Surtax---Computation of chargeable profits---Royalty received by company is deductible---Indian Companies (Profits) Surtax Act, 1964, Sched. I, R.1.
(b) Income-tax---
----Company---Surtax---Appeal to Appellate Tribunal---Rectification of mistakes---Order passed by I.T.O. refusing deduction---Application for rectification rejected by I.T.O.---Commissioner of income-tax (Appeals) upholding order of I. T. O.---Appellate Tribunal deeming appeal to be one under S.1 I and allowing deduction after considering the merits of the case-- Order of Tribunal was valid---Indian Companies (Profits) Surtax Act, 1964, Ss.11 & 13.
For the assessment year 1976-77 the assessee in its surtax return had shown the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964, as Rs.26,35,744. In the assessment order, there was no mention with regard to the assesee's claim for deduction of royalty of Rs.24,239. The letter to the Income-tax Officer stated that the royalty was not deducted as claimed by the assessee, while computing the chargeable profits. Accordingly, the assessee requested the Income-tax Officer to issue a revised order, rectifying the above mistake under section 13 of the Companies (Profits) Surtax Act, 1964. The Income-tax Officer pointed out that the royalty of Rs.24,239 was not deducted since the assessee had not obtained approval from the Central Board of Direct Taxes for the agreement for receipt of royalty as per the provisions contained in section 80-MM of the Income Tax Act, 1961. On appeal the Commissioner of Income-tax (Appeals) held that there was no mistake requiring rectification. On further appeal, the Tribunal considering the provisions contained in Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, held that the approval of the Central Board of Direct Taxes was not necessary for allowing deduction of royalty payment while computing the chargeable profits of the company, because the embargo for allowing the royalty as a deduction as placed under section 80-MM of the Income-tax Act, 1961, was absent in the provisions contained in Rule I(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964. On a reference:--
Held, (i) that the Tribunal was correct in coming to the conclusion that the royalty payment was deductible while computing the chargeable profits of the company under the Companies (Profits) Surtax Act.
(ii) That since the appeal preferred by the assessee was deemed to be under section 11(1) of the Act and inasmuch as the Tribunal dealt with the issue on the merits, even though the Commissioner of Income-tax (Appeals) had not done so, the order passed by the Tribunal was valid.
JUDGMENT
K.A. THANIKKACHALAM, J.--- At the instance of the Department, the Tribunal referred the following questions, for the opinion of this Court, under section 256(1) of the Income-tax Act, 1961, read with section 18 of the Companies (Profits) Surtax Act, 1964:
(1) Whether the Appellate Tribunal is justified in law in holding that the assessee's appeal before the Commissioner (Appeals) being regarding the merits of the Income-tax Officer's rejection of the assessee's claim which falls within the scope of section I1 (1) of the Act, the Commissioner (Appeals) should have disposed of the assessee's appeal dealing with the merits of the assessee's claim, and not with reference to the scope and applicability of section 13 of the Companies (Profits) Surtax Act, 1964?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that for purpose of computing the chargeable profits under the Companies (Profits) Surtax Act, 1964, the sum of Rs.24,437 should be excluded from the total income as arrived at in the income-tax assessment, as representing 'royalty' even though the said sum cannot be treated as 'royalty' within the meaning of section 80-MM of the Income-tax Act, 1961?"
For the assessment year 1976-77, the assessee in its surtax return had shown the chargeable profits under the First Schedule to the Surtax Act, as Rs.26,35,744. In the assessment order, there was no mention with regard to the assessee's claim for deduction of royalty of Rs.24,239. The assessee in its letter, dated January 10, 1979, to the Income-tax Officer, stated that the royalty of Rs.24,239 was not deducted as claimed by the assessee, while computing the chargeable profits. Accordingly, the assessee requested the Income-tax Officer to issue a revised order, rectifying the above mistake under section 13(1) of the Act. The assessee also sent a reminder on Aptil 3, 1980. The Income-tax Officer sent a reply, dated April 3, 1980, enclosing a copy of his revised order, dated January 31, 1979. The Income-tax Officer pointed out that the royalty of Rs.24,239 was not deducted since the assessee has not obtained approval from the Central Board of Direct Taxes for the agreement for receipt of royalty as per the provisions contained in section 80-MM of the Income-tax Act. Hence, according to the Income-tax Officer, royalty cannot be deducted while computing the chargeable profits, since the assessee has not obtained the approval from the Central Board of Direct Taxes for the agreement for payment of royalty. On appeal, the Commissioner of Income-tax held that there is no mistake in the order to be rectified under section 13(1) of the Act. Accordingly, the appeal by the assessee was dismissed. On further appeal, the Appellate Tribunal following its earlier order in S.T.A. No.13 (MDS) of 1977-78, C-Bench of the Tribunal, order, dated May 6, 1978, accepted the assessee's contention and held that the royalty payment of Rs.24,239 was deductible as a deduction while computing the chargeable profits of the company.
Learned standing counsel appearing for the Department submitted before us that the Tribunal was not correct in permitting deduction of the royalty payment while computing the chargeable profits of the company. Accordingly, learned standing counsel submitted that without the approval from the Central Board of Direct Taxes of the agreement for payment of royalty, deduction cannot be allowed while computing the chargeable profits under Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act. On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that the approval of the Board of the agreement for payment of royalty is not necessary for claiming deduction of royalty payment while computing the chargeable profit of the company, as it was prescribed under section 80-MM of the Act. It was, therefore, pleaded that there was no infirmity in the order passed by the Tribunal in allowing deduction of the royalty payment under Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964.
We have heard both learned standing counsel for the Department as well as the assessee. The fact remains that while filing the return for the assessment year under consideration, the assessee claimed deduction of royalty payment amounting to Rs.24,239 while computing the chargeable profits of the company. In the original assessment, the income-tax Officer did not mention anything about this deduction. Thereafter, the assessee wrote a letter seeking deduction of royalty payment as deduction under Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The Income-tax Officer pointed out that without the approval by the Central Board of Direct Taxes of the agreement for payment of royalty, it cannot be allowed as a deduction as per the provisions contained in section 80-MM of the Income-tax Act, 1961. Therefore, under the Companies (Profits) Surtax Act also such a deduction is not possible without the approval of the Board. However, the Tribunal considering the provisions contained in Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, held that the approval of the Central Board of Direct Taxes is not necessary for allowing deduction of royalty payment while computing the chargeable profits of the company, because the embargo for allowing the royalty as a deduction as placed under section 80-MM of the Income-tax Act, 1961, is absent in the provisions contained in Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964. Inasmuch as the Tribunal was correct in coming to the conclusion that the royalty payment is deductible as a deduction under Rule 1(ix) of the First Schedule to the Companies (Profits) Surtax AV, 1964, while computing the chargeable profit of the company, we consider that there is no infirmity in such an order passed by the Tribunal. Accordingly, we answer question No.2 referred to us in the affirmative and against the Department.
In so far as question No. I is concerned, the Department is aggrieved by the order passed by the Tribunal on the merits, since the Commissioner of Income-tax has not disposed of the appeal on the merits. In the original assessment order, the Income-tax Officer failed to consider the deduction claimed with regard to royalty payment. Subsequently, on a letter given by the assessee, the Income-tax Officer passed an order on January 31, 1979, stating the reasons for not allowing the deduction as claimed by the assessee. Therefore, the assessee filed an appeal before the Commissioner of Income tax stating that the Income-tax Officer was not correct in not rectifying the mistake involved in the original order under section 13 of the Act. The Commissioner of Income-tax, however, held that the Income-tax Officer was correct in not rectifying the mistake as alleged by the assessee. But no order was passed by the Commissioner on the merits. The assessee filed a second appeal before the Tribunal: The Tribunal held that the appeal preferred by the assessee before the Commissioner of Income-tax would fall under section 11(l) of the Act and, therefore, the appeal is competent even on the merits. In that view of the matter, the Tribunal following an earlier order of its own, on a similar point, allowed the claim made by the assessee. Inasmuch as the appeal preferred by the assessee was deemed to be under section 11(1) of the Act and inasmuch as the Tribunal dealt with the issue on the merits, even though the Commissioner has not dealt with the same on the merits we consider that there is no infirmity in the order passed by the Tribunal on this aspect. Accordingly, we answer question No. 1 referred to us in the affirmative and against the Department. No costs.
C.M.A./1709/FC
Reference answered.