Jaganmohan Reddy, J. - (1.) These appeals are by certificate against the judgment of the Rajasthan High Court answering the questions referred to it by the Income-tax Appellate Tribunal under Section 66 (1) of the Income Tax Act, 1922 (hereinafter referred to as the 'Act') partly in favour of the revenue and against the assessee. The assessee appellant is a public company on which the assessments in dispute were levied for the years 1950-51, 1951-52 and 1952-53, the corresponding previous years being the years ending 31st March, 1950, 31st March 1951 and 31st March 1952 respectively. It appears from the statement of the case that the appellant carries on the business of sale of sugar and oil, that the manufacture of sugar was started in 1940 while that of oil in 1942. On April 5, 1932 the Maharana of the Udaipur State, in exercise of his sovereign powers as a Ruler granted through the intervention of Pandit Ramakant Malaviya a licence for the manufacture of sugar to Sri Banarsiprasad Jhunjhunwala which was to be a monopoly enuring to his benefit for 32 years. Clauses (2), (3) and (5) of the terms of licence which are relevant are as under:-"(2) No permission will be granted to any other person for starting a sugar factory for a period of 32 years from the date of this order. (3) If they require land for sugarcane for this factory it will be allotted out of the Khalsa uncultivated land not less than 5000 and subject to a maximum of 30,000 acres as may be available in the vicinity of Jaisamund. Mr. Banaarsi Prasad Jhunjhunwala will have to acquire 5000 acres within two years of this order and the remaining should be acquired within 10 years from the date of order; if land near Jaisamund is not found suitable for cultivation of sugarcane, some other land if available in some other Pargana of Mewar may be allotted. This land will be given without Nazrana with full ownership right (Bapi) on the condition that it will not be alienated without sanction of Durbar. No land revenue will be charged for first five years from the date of acquisition .......After that full land revenue will be charged.....the rate of land revenue will be refixed according to settlement rules and likewise will be done in future according to settlement rules............ ********** (5) Royalty will be charged on price of goods manufactured in the factory. If after five years the rate be found excessive for the running of the factory, it can be considered then. On sugar manufactured in the factory no other tax will be charged". After the grant of this monopoly, Malaviya and Jhunjhunwala floated a limited company called the "Mewar Industries Ltd". This company then took steps to set up a factory, obtain requisite machinery and instal it. After completion of the factory production could not be started on account of financial difficulties. Thereafter, the Government gave notice to the company on March 19, 1936 that If it did not start the business the permission granted to it would be granted to other parties for the manufacture of sugar. In view of this notice, the said Malaviya and Jhunjhunwala arranged for Bansidhar Dhandania and Lokenath Prasad Dhandania (hereinafter referred to for convenience as 'Dhandanias') to acquire from the company all the rights and assets held by it for the unexpired period of 28 years and to run the business in consideration of the payment of 10 % of the net profits of the business. On November 15, 1936 an agreement was entered into between the said Dhandanias end Jhunjhunwala whereby the rights of monopoly available to Jhunjhunwala and Malaviya were transferred to Dhandanias. The inter se arrangement under the agreement which is set out in the statement of the case is not really material for the purpose of this case and is therefore not referred to here. It may however be mentioned that the Government permitted this arrangement after which the Dhandanias floated a new company known as Mewar Sugar Mills Ltd. (hereinafter called the appellant) and on March 11, 1940 Jhunjhunwala transferred to the sugar company his rights under an agreement. It is not relevant to set out all the clauses of the agreement except to notice that under one of the clauses it was provided that the transferee shall "until the expiry of the period mentioned in the said licence and monopoly or in the event of the period thereof being extended whether in the name of the company or otherwise, so long as the monopoly rights and licence continue to be in force, under such extension, pay and continue to pay to each of the transferor and to his nominee the said Pandit Ramakant Malaviya yearly and every year 1 1/4 per- centum respectively of the net profits of the business of the company to be ascertained from the audited accounts of the company, provided however the profits payable to the transferor and the said Pandit Ramakant Malaviya shall be in respect of such businesses only as are provided in the said monopoly and licences".
(2.) By and under the said arrangement the appellant was carrying on the business of sugar manufacture and during the years 1950-51, 1951-52 and 1952-53 it paid to the State Government in respect of sugar Rupees 72,394, Rs. 15,724 and Rupees 50,455/and in respect of oil Rs. 24,729, Rupees 18,168 and Rs. 13,909/- respectively. It also paid to Jhunjhunwala and Malaviya for the year 1950-51 Rupees 3072; and for the year 1952-53 Rupees 2,613/- in lieu of the monopoly rights and licences at the stipulated amount of 11/4 per cent,. The assessee claimed that the amounts paid in respect of the monopoly and licence as also those paid to the Government in respect of the royalty for sugar and oil were deductible expenses but the Income-tax Officer disallowed them holding that the expenditure in respect of the said amounts were of a capital nature. In appeal the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. Against this order a further appeal was filed to the Tribunal which was rejected. On an application by the assessee under Section 66 (l) of the Act, the following question was referred to the High Court:- " Whether on a proper construction of Annexure 'A' and Annexure 'E' the sums paid to the respective parties are allowable as expenditure under the provisions of Section 10 (l) or 10 (2) (xv) -
(3.) It may here he mentioned that annexure 'A' referred to in the question is the grant while annexure 'E' is the agreement between Jhunjhunwala and the appellant. The High Court, as already stated, answered the question partly against the assessee holding that "on a proper construction of the annexures 'A' and 'E' the sum paid by the assessee to the State Government as royalty on the sale of oil and its products is an allowable deduction under the provisions of Section 10 (l) or 10 (2) (xv) of the Act but the payment made by the assessee to the transferor and his nominee in terms of the agreement or the royalty paid by the assessee to the State Government in respect of sugar is not an allowable deduction" under the aforementioned provisions of the Act.;