Dwarka Prasad, J. - (1.) IN these three cases, identical questions have been referred to this court by the INcome-tax Appellate Tribunal, Delhi Bench 'A' (hereinafter referred to as "the Tribunal") for our opinion and as these questions arise out of the same facts and in similar circumstances, we consider it proper to dispose of the three reference cases together by a common order.
(2.) THE question which has been referred to this court by the Tribunal in Income-tax Reference No. 1 of 1971, is to the following effect: "Whether, on the facts and in the circumstances of the case, a demand of Rs. 1,07,837 by the assessee can be disallowed as capital expenditure ? " The common question, which has been referred to us in Income-tax References Nos. 19 of 1972 and 13 of 1973, is asunder : "Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,20,775 and Rs. 2,14,795 made by the assessee to the State of Rajasthan can be allowed in assessment years 1953-54 and 1954-55 respectively under Section 10(2)(xv) of the Indian Income-tax Act 1922 ? " The assessee is a registered company and in the year 1941 the assessee company entered into an agreement with the then ruler of the former State of Jodhpur, with a view to establish a cotton mill at Pali, which was then situated in the former Jodhpur State. We need not go into the details of the terms and conditions of the agreement arrived at between the assessee-company and the former ruler of the erstwhile State of Jodhpur. After India obtained independence, the former State of Jodhpur merged with the other princely States of Rajasthan to form the United States of Rajasthan and the Indian Income-tax Act was made applicable to Rajasthan, which was then a Part B State, from April 1, 1950. It would be sufficient in these cases to say that certain amounts were paid by way of royalty by the assessee-company to the State of Rajasthan as the succeeding State, in the assessment years 1952-53 and 1953-54, in accordance with the terms of the aforesaid agreement with the former ruler of the erstwhile Jodhpur State. The assessee-company also made provision in its books of account for payment of the amount of royalty, during the accounting year relevant to the assessment year 1954-55. The amounts thus paid and for which provision was made by the assessee-company during the three assessment years were as under ; JUDGEMENT_519_ITR149_1984Html1.htm The income-tax authorities, while making assessments for the aforesaid three assessment years, disallowed the expenditure incurred by the assessee-company on account of royalty as specified above, on the ground that such expenditure was not incurred for the purposes of carrying on the business of the assessee-company. Thus, the claim of the assessee-company that such payments were of the nature of revenue expenditure was disallowed. The finding of the Tribunal in this respect was that the expenditure incurred by the assessee-company regarding payment of royalty was made for acquiring an advantage of enduring nature for its business and thus the same was in the nature of capital expenditure. It was in the context of the aforesaid facts that the questions mentioned above have been referred to us by the Tribunal for our opinion.
(3.) THE assessee-company filed a civil suit and disputed its liability to pay income-tax on the basis of the terms of the agreement entered into by the company with the former ruler of the erstwhile State of Jodhpur and in the alternative claimed that the State Government was bound to refund to the assessee-company such amount out of the royalty paid by it, which was payable by way of income-tax ; or in other words, the company sought reimbursement from the State of Rajasthan in respect of the amount of income-tax payable by the assessee-company, on the basis of the terms of the aforesaid agreement. THE dispute was ultimately taken to the Supreme Court and in Maharaja Shree Umaid Mills Ltd. v. Union of India [1963] 48 ITR (SC) 186, their Lordships of the Supreme Court held that as the United States of Rajasthan or the Part B State of Rajasthan did not affirm the agreement entered into by the company with the ruler of the former State of Jodhpur, the assessee-company had no enforceable right against either the United States of Rajasthan or the Part B State of Rajasthan. THEreafter, the assessee-company filed another suit in the court of District Judge, Jodhpur, against the State of Rajasthan for the refund of the amount of royalty paid by the assessee-company from the year 1949 to the year 1954. This suit was decreed by the Additional District judge, Jodhpur, on April 11, 1972, and in pursuance of the decree passed by the Additional District Judge, the assessee-company has obtained the refund of the amount of royalty paid by the company to the State Government during the assessment years 1952-53 and 1953-54, besides the amount relating to royalty for the earlier years. As we have already mentioned above, the assessee-company had not made payment of the amount of royalty in respect of the assessment year 1954-55, but the company in that year made provision in its books of account for payment of the royalty amount in terms of the agreement. Thus, now, on account of the subsequent events enumerated above, the situation is that the assessee-company has either not paid any amount by way of royalty or the amount of royalty paid has been refunded in respect of the three years, namely, 1952-53, 1953-54 and 1954-35. Whatever amount had been paid by the assessee-company to the State Government by way of royalty, in respect of the two of the aforesaid three years, has already been received back by the assessee-company in pursuance of the decree passed by the Additional District Judge. Section 10(2)(xv) of the Indian I.T. Act, 1922, with which we are concerned, provided that the profits or gains of business of an assessee shall be computed for payment of tax under the Act as the income of the assessee, after making allowance in respect of any expenditure, not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purposes of such business. The questions which have been referred to us in these three reference cases are as to whether the expenditure incurred by the assessee-company in making payment of the royalty amount to the State Government was wholly or exclusively expended for the purpose of the company's business or in other words whether such expenditure was of the nature of revenue expenditure or was it a capital expenditure ? Thus, the questions referred to us presuppose that the expenditure has been incurred by the assessee-company in making payment of the amount of royalty for the three assessment years in question, and we are required merely to determine the nature of such expenditure. However, as mentioned by us above, the actual situation is that the assessee-company either did not make payment of the amount of royalty or has obtained a refund of the said amount and thus the assessee-company did not make any expenditure at all in this respect. In Indian Molasses Co. (Private) Ltd. v. CIT [1939] 37 ITR 66 (SC), their Lordships of the Supreme Court observed that "expenditure" in Clause (xv) means expense and the idea behind it is of spending or paying money out or away. Their Lordships observed that to constitute an expenditure for purposes of Clause (xv) of Section 10(2); the payment should be made irrevocably so that there should be no possibility of the money forming once again a part of the funds of the assessee-company. ;