COMMISSIONER OF INCOME-TAX VS GORELAL DUBEY, 2000 PTD-MADHYA-PRADESH-HIGH-COURT-INDIA 556 (1996)

Income-tax---

----Business expenditure---Deduction only on actual payment---Royalty is a tax---Unpaid liability towards royalty payment is disallowable---Indian Income Tax Act, 1961, S.43B.

The assessee claimed deduction of liability for payment of royalty. The Income-tax Officer disallowed it treating it as a levy to which section 43B of the Income Tax Act, 1961, was applicable. The Tribunal allowed the appeal of the assessee holding that royalty was a contractual payment for extraction of lime stone. On a reference:

Held, that the royalty is a tax. Therefore, the Tribunal was not justified in holding that the provisions of section 43B were not applicable to the unpaid liability towards royalty payment.

India Cement Ltd. v. State of Tamil Nadu (1991) 188 ITR 690; AIR 1990 SC 85 and State M. P. v. Mahalaxmi Fabric Mills Ltd. AIR 1995 SC 2213 fol.,

V. K. Tanka for the Commissioner.

H. S. Shrivastava for the Assessee.

JUDGMENT

This is an income-tax reference under section 256(1) of the Income Tax Act, 1961, at the instance of the Revenue and the following question of law has been referred by the Tribunal for answer by this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that the provisions of section 43B of the Income-tax Act were not applicable to the unpaid liability towards royalty payment of Rs.76,956 since royalty was neither tax nor duty?"

The brief facts giving rise to this reference are that the assessee in its return for the Assessment Year 1984-85 had among others claimed a deduction of Rs.76,956 towards its liability for payment of royalty. This claim was disallowed by the Assessing Officer in view of the provisions of section 43B of the Income Tax Act, 1961. According to the Assessing Officer, the payment of royalty was a levy to which provisions of section 43B were applicable. The appeal of the assessee against the order of the Assessing Officer was dismissed by the Commissioner of Income-tax (Appeals). On further appeal before the Tribunal, the Tribunal held that only tax and duty was disallowable under the provisions of section 43B of the Income-tax Act. It was explained that a tax or duty was a compulsory extraction of money by public authority for public purposes enforceable by law and was not a payment for services or goods. It was further held that a tax or duty was not and need not be supported by any consideration or services rendered in turn or goods acquired. Royalty, on the other hand, in the opinion of the Tribunal was for consideration of the goods, i.e., the limestone, being extracted by the assessee from the quarry. According to the Tribunal, there was an element of quid pro quo between the persons who paid the royalty and the public authority which imposed it. According to the Tribunal, royalty was a contractual payment made by the assessee for extracting lime from the land. The Tribunal, accordingly, allowed the appeal of the assessee. Hence, an application was made for making reference to this Court and, accordingly, the aforesaid question has been referred by the Tribunal for answer by this Court.

We would have examined the question whether royalty is a tax or the price paid for the goods acquired or services rendered in turn, but in view of the decision of their Lordships of the Supreme Court given in the case of India Cement Ltd. v. State of Tamil Nadu (1991) 188 ITR 690 and in the recent case of State of M. P. v. Mahalaxmi Fabric Mills Ltd. (1995) AIR 1995 SC 2213, we need not pursue the argument any further. Normally the concept of royalty as is understood in terms of mineral rights is that this is to be paid to the State for extraction of minerals from a land, i.e., something as a price for the use of the State minerals. But their Lordships of the Supreme Court in the case of India Cement Ltd. (1991) 188 ITR 690 have taken a view that such royalty is not a price and it has to be held to be a tax and as such a cess on royalty would be a tax on royalty. This was also a case with regard to imposition of cess on royalty on mineral rights under the T. N. Panchayats Act, whether the State is competent to levy cess or not. Their Lordships came to a conclusion that the State is not competent to levy this cess as this is covered by entry 54 of List 1 (Union List) and entry 49 of List II does not cover this. Therefore, the levy of cess was struck down. In that context, their Lordships observed as under (page 707):

"In the aforesaid view of the matter, we are of the opinion that royalty is a tax and as such a cess on royalty, being a tax on royalty, is beyond the competence of the State Legislature because section 9 of the Central Act covers the field and the State Legislature is denuded of its competence under entry 23 of List II. In any event, we are of the opinion that cess on royalty cannot be sustained under entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land."

In paragraph 31 (at page 707 of 188 ITR) of the judgment, their Lordships, after referring to the views expressed by the Rajasthan, Punjab, Gujarat and Orissa High Courts that the royalty cannot be said to be a tax because this is something which is being paid in lieu of minerals extracted, in paragraph 34 (at page 707 of 188 ITR), concluded by saying that the royalty is a tax, and thus, the decisions of the High Courts cannot hold good. This has also been held by their Lordships in the case of State of M. P. v. Mahalaxmi Fabric Mills Ltd., AIR 1995 SC 2213, after referring to the case of India Cement Ltd. (1991) 188 ITR 690 (SC) that (page 2218 of AIR 1995 SC).

"In our considered opinion there is no substance in either of the twin contentions for challenging vires of section 9(3). So far as competence to enact section 9 is concerned, the question is no longer res integra. It is covered by the Constitution Bench decision of this Court in the case of India Cement Ltd. (1991) 188 ITR 690 (SC); (1990) 1 SCC 12, AIR 1990 SC 85. In that decision the Constitution Bench, speaking through Sabyasachi Mukherji, J., as he then was, expressly rules that royalty is a tax and for imposing such royalty the State Legislature will have no power under entry 50 of the Second List. Mr. Sanghi contended that strictly royalty cannot be said to be a tax and to that extent, the decision of the Constitution Bench may appear to be erroneous. It is not possible to agree with this contention. In paragraph 34 of the report, the Constitution Bench has made the following pertinent observations:

(34) . In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competences of the State Legislature because section 9 of the Central Act covers the field and the State Legislature is denuded of its competence under entry 23 List II. In any event, we are of the opinion that cess on royalty cannot be sustained under entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.

In this view of the matter, the view taken by the Tribunal appears to be incorrect. Hence, we answer this reference against the assessee and in favour of the Revenue.

M.B.A/3221/FC Reference answered.