SINHA,J. - (1.) THIS is a reference under s. 66(1) of the IT Act. The facts are as follows : The assessee in this case is a limited company, M/s H. Dear and Co. Ltd., Calcutta, and the asst. yr. is 1953-54, relevant to the accounting year ending 31st July, 1952. The assessee is a company which collects timber from Nowrangpur and Ramgiri forests in Jeypore, Orissa. For the period from 1st July, 1944, to the 30th June, 1950, the assessee was permitted to collect timber for extraction and sale of sleepers under two separate leases both dt. 14th Sept., 1944, granted by the Maharaja of Jeypore, copies of which are annexed to the statement of case dt. 30th July, 1959, marked as annexures "A" and "B". The following terms appearing in the agreement with regard to the Ramgiri forest are important. The terms with regard to the Nowrangpur forest are practically the sam : "1. That for and in consideration of the sums of money to be paid by the company in the manner and at the times and rates hereinafter specified and subject to the terms and conditions hereinafter appearing the Maharajah agrees to sell and the company agrees to buy all the sal trees, for the manufacture of sleepers and scantlings, which may be marked by the forest Department for felling in the reserved, protected and unreserved lands of the Ramgiri Range (hereinafter known as the 'leased area'), the boundaries of which are delineated and shown on the map hereunto annexed and more particularly described in the schedule hereunto appended. 2. That the company shall have the right and liberty within the said area to fell all sal trees so marked as aforesaid and to convert the same into sleepers in the leased area and to export the timber so converted therefrom during a period of six years from 1st July, 1944, to 30th June, 1950 : Provided that the Maharajah, at the request of the company, renews this lease for a further period of five years from 1st July, 1950, on terms to be mutually agreed upon failing which both the parties agree to abide by the decision of the Conservator of Forests, Orissa, or the Collector and Agent to the Governor, Koraput, on the terms in dispute as final.... Only the sleepers and scantlings referred to in cl. 5 extracted from the sal trees and passed by the company shall become the property of the company. All slabs, butts, top-ends, rejected sleepers, and other pieces of timber shall remain and be the sole property of the Maharajah who may dispose them of in such manner as he may deem fit."
(2.) CLAUSE 7 provides that the royalty payable shall be a percentage of the selling price of sleepers, meaning thereby the price paid by the Sleeper Control Officer, Eastern Group, to the company for sleepers extracted from Jeypore forests. Clause 9 provides that the Maharajah shall provide each year in the leased area, standing sal trees of the exploitable girth defined in cl. 3, to the extent of not less than 10,000 in number, provided that the number so provided should be such as to cover the minimum royalty of Rs. 20,000 which is to be paid annually under cl. 10. These leases were to expire on the 30th June, 1950. But even before the said leases expired, it was agreed between the parties that the rates of royalty stipulated in the leases were too low and provided that the leases were renewed for a period of five years, the company would pay additional back-royalty for the period from 1st June, 1948, to 30th June, 1950. Under the two leases, the rate of royalty raried between 20per cent and 27per cent in respect of sleepers sold to the railways. What was agreed upon is an acceptance of the fact that the royalty paid at those rates was too low. But the company did not agree to pay an enhanced amount without a consideration. It agreed to pay the back- royalty, or to be accurate, the balance thereof, calculating the royalty to be 30per cent in all cases, retrospectively from 1st June, 1948, provided the leases were renewed for a further period of five years. It was, however, realised that in order to make this effective it was necessary to obtain the permission of the Government. According to the Madras Forest Act and the Jeypore Forest Rules, such permission is necessary for entering into a valid lease. The parties provided for the same in the following manner : A formal deed of lease was executed some time prior to 16th Jan., 1950, but this was to become effective only upon the Government sanction being granted. It was however realised that the Government grant could be for a period of less than five years. In that case, it was agreed that the back-royalty payable would be calculated proportionately. For example, if the total back-royalty for five years was Rs. 2,00,000 and the Government sanction for the said lease was only for two years, the actual back-royalty payable would be 2/5th of Rs. 2,00,000, namely, Rs. 80,000, which would be payable in two annual instalments of Rs. 40, 000 each, per year.. All this appears clearly from a letter written on behalf of the assessee-company to the Dewan of Jeypore dt. 16th Jan., 1950, a copy of which is annexed as annexure "C" to the said statement of case. The next thing that happened was that the District Magistrate and Collector of Koraput, acting under the Orissa Preservation of Private Forests Act, 1947, accorded sanction to the extension of lease only for one year from 1st July, 1950, to 30th June, 1951. It appears that on the 21st March, 1951, an agreement was arrived at between the company and the Jeypore Estate by which it was agreed that the existing rates of royalty were as follow :
(3.) IT was agreed that in future the royalty payable would be as follows : (See annexure "F" to the statement of case). The following other terms of the agreement are important and are set out as follows : "Further Mr. Willis has agreed to pay Rs. 9,000 (Nine thousand) in addition to Rs. 69,000 already "B. Gs. (Broad gauge) 29% of the latest price accepted by the Sleeper Control Officer, Eastern Group M. Gs. (Metre gauge) 25% " N. Gs. (Narrow gauge) 25% " Special sizes (i.e. all sleepers other than B.G., M.G. and N.G.) 25% " "B. Gs 30% M.Gs 26% N. Gs 26% Specials 30%" agreed to be paid towards back-royalties each year. ;