Dwarka Prasad, J. - (1.) THIS is a consolidated reference made by the Income-tax Appellate Tribunal, Bombay Bench ' C ', Bombay (hereinafter referred to as " the Tribunal "), under Section 66(1) of the Indian I.T. Act, 1922, by which seven questions have been referred to this court.
(2.) WE may briefly state the facts, which have given rise to this reference application. The Associated Stone Industries (Kotah) Ltd. (hereinafter referred to as " the assessee-company ") was incorporated in the then Indian State of Kotah on January 17, 1945, as a public limited company for carrying on the business of quarrying stones. The then Maharao of Kotah State granted a lease to the assessee-company on May 2, 1945, for a period of 15 years beginning from October, 1944. Clause 18 of the lease agreement entered into by the assessee-company with the then Maharao of Kotah for quarrying flooring stones was as under : " 18. (i) In consideration of the concessions and privileges granted by the GRANTOR and in lieu of income-tax, super-tax and excess profits tax, the GRANTEE covenants to pay to the GRANTOR royalty on the stone excavated at the rate of rupee one per 100 sq. ft., subject to the minimum amount of Rs. 1,50,000 per financial year, provided that the aforesaid rate of Re. 1 per 100 sq. ft., will be operative so long as the selling rate of unpolished slabs does not exceed Rs. 10 per 100 sq. ft.; in the event of the selling rate going above this figure the royalty per 100 sq, ft. shall be increased by 25% of the excess over ten rupees. (ii) The minimum royalty will be payable in four equal instalments in advance every quarter. Provided that if in any quarter the royalty payable calculated at the rate mentioned in sub-para. (1) exceeds the instalment of minimum royalty paid in advance for that quarter, the balance shall be made up within the next quarter. " The Kotah State merged with the United State of Rajasthan and the Indian I.T. Act, 1922, was brought into force in the newly formed State of Rajasthan with effect from April 1, 1950. The assessee-company submitted an application to the Commissioner of Income-tax for a declaration that it was exempt from the payment of income-tax in accordance with the terms of the lease granted to it by the then Maharao of Kotah. But the aforesaid application was rejected. Thereafter, the assessee-company filed a civil suit in the court of the District Judge, Kotah, against the Union of India and the State of Rajasthan, seeking a declaration that it was exempt from payment of income-tax and that the royalty paid by it in excess of the minimum amount of Rs. 1,50,000 was in lieu of income-tax, super-tax, etc. The learned district judge by his decree and order dated August 23, 1957, held that the royalty which was paid by the assessee-company to the State of Rajasthan, in accordance with the provisions of Clause 18 of the grant, consisted of two parts, namely, the sum of Rs. 1,50,000 represented royalty proper, while the remaining amount of royalty paid by the assessee-company was in lieu of income-tax, super-tax and excess profits tax. According to the learned district judge, the State of Rajasthan was entitled to the minimum royalty of Rs. 1,50,000 as, according to him, the said amount was attributable to the concessions and privileges granted by the Government to the assessee-company, while the remaining amount paid by the assessee-company, in excess of Rs. 1,50,000, was further divisible into two parts consisting of the amount paid in lieu of income-tax, super-tax and excess profits tax, which was payable to the Union of India by way of federal taxes on incomes or profits, while the amount left by way of residue, out of the amount paid by the assessee-company under Clause 18 of the grant after the deduction of the income-tax, super-tax and excess profits tax, shall be payable to the State of Rajasthan. Thus, the State of Rajasthan was held entitled to the minimum royalty amount of Rs. 1,50,000 while the Union of India was held entitled to the amount equal to the tax liability of the assessee-company in respect of the federal taxes out of the excess royalty paid in that year, and the State of Rajasthan was held entitled to the residue left out of the total amount paid by the assessee-company under Clause 18 of the grant. The learned district judge, however, dismissed the suit against the Union of India. An appeal was preferred by the State of Rajasthan against the aforesaid decree and order passed by the learned district judge, Kotah, which was partly allowed by this court. The High Court held that the agreement dated May 2, 1945, became void on the coming into force of the Constitution of India on January 26, 1950, or from April 1, 1950, as it granted monopoly rights to the assessee-company for quarrying stones in the specified areas and that the royalty was payable thereafter by the assessee-company to the State of Rajasthan in accordance with the provisions of the Rajasthan Miner Mineral Concessions Rules. The High Court also held that the amount paid by the assessee-company to the State Govt. of Rajasthan, in excess of the amount payable by way of royalty, was refundable to the assessee-company. We have been informed by the learned counsel for the parties that an appeal in the matter is still pending before the Supreme Court of India. We may, however, note that although the suit of the assessee-company was dismissed by the learned district judge, Kotah, as against the Union of India, yet the assessee-company did not prefer any appeal in that matter before the High Court, with the result that the order passed by the learned district judge, Kotah, had no binding effect so far as the Union of India is concerned. The ITO, in the assessments for the years 1950-51 to 1956-57, disallowed the deduction of the minimum royalty amount of Rs. 1,50,000 from the taxable income of the assessee-company on the ground that the same was capital expenditure, while deduction of royalty paid by the assessee-company in excess of Rs. 1,50,000 was allowed. The same position was maintained by him in respect of the assessments for the assessment years 1957-58 to 1961-62. In the year 1959, notices for reassessment of tax, under Section 34(1)(a) of the Indian I.T. Act, 1922, were issued for the assessment years 1950-51 to 1956-57. The ITO reassessed the income of the assessee- company for the years 1950-51 to 1956-57 and held that as the amount of royalty paid by the assessee-company in excess of the sum of Rs. 1,50,000 was in lieu of income-tax, etc., the same could not be allowed as deduction to the assessee-company and as such the amount of excess royalty allowed earlier as deduction was disallowed and was added back to the income of the assessee-company. The assessee-company preferred appeals before the AAC against the aforesaid orders of reassessment passed by the ITO, Kotah, but the appeals were dismissed. Then the assessee-company filed appeals before the Income-tax Appellate Tribunal, which disposed of seven appeals relating to the reassessment proceedings made under Section 34(1)(a) of the Act, for the assessment years 1950-51 to 1956-57, by one consolidated order dated September 7, 1968. The Tribunal held that the proceedings under Section 34 of the Act would not be initiated in view of the decision of their Lordships of the Supreme Court in Calcutta Discount Co. Ltd, v. ITO [1961] 41 ITR 191. It was held by the Tribunal that the assessee-company had disclosed all relevant or material facts and as there was no failure on the part of the assessee-company to disclose fully and truly any relevant material necessary for the assessments in respect of the years in question, the necessary pre-requisite conditions for invoking the jurisdiction for reassessment under Section 34(1)(a) of the Act were absent. The Tribunal further held that the proceedings for reassessment for the assessment years 1954-55, 1955-56 and 1956-57, although initiated within a period of four years from the date of the original assessment for those years, yet because such proceedings were initiated under Section 34(1)(a) of the Act, they could not be upheld as having been made under Section 34(1)(b) of the Act. The Tribunal also held that the portion of the excess royalty paid by the assesse-company to the State Govt., which was equivalent to the tax liability of the assessee-company, could not be held as permissible deduction, as the income-tax and other taxes were payable to the Union Govt. However, the remaining portion of the excess royalty, which was left out by way of residue, after deducting the amount paid in lieu of tax liability by the assessee-company, out of the excess royalty, was permissible deduction on the basis of the principles laid down by their Lordships of the Supreme Court in Gotan Lime Syndicate v. C1T [1966] 59 ITR 718. It was further held by the Tribunal that the royalty paid on polished stones, in accordance with the provisions of Clause 19 of the agreement, constituted a part of the cost of the stones and is a permissible deduction, being an expenditure of revenue nature. The Tribunal lastly held that the assessee-company was entitled to the credit of that portion of the royalty, which was paid by it in lieu of income-tax and super-tax liability of the assessee-company. By another order passed on September 7, 1968, the Tribunal allowed the appeals preferred by the assessee-company in respect of the assessment years 1957-58 to 1961-62, holding that a sum of Rs. 1,50,000, as the minimum amount of royalty payable by it, was expenditure of revenue nature and was a permissible deduction and that out of the excess royalty paid by the assessee-company, the residue left, after payment of the amount equivalent to income-tax, super-tax, etc., to the Union Govt., was also revenue expenditure and was a permissible deduction although the amount of excess royalty representing its liability in respect of income-tax, super-tax and other direct taxes payable to the Union of India could not be deducted from the taxable income of the assessee-company, adopting the reasoning given by it in the earlier order passed on the same day, which has been referred to above. The Commissioner, Rajasthan, Jaipur, submitted applications under Section 66(1) of the Act in respect of all the 12 appeals decided by the Tribunal by its two orders dated September 7, 1968, relating to the assessment years 1950-51 to 1961-62, and at the request of the parties, the Tribunal agreed to submit a joint and consolidated statement of the case to this court. It was thus, on the applications under Section 66(1) of the Act, that the Tribunal has made a consolidated statement of the case and has referred the following seven questions to this court by its order dated September 24, 1969 : " 1. Whether, on the facts and in the circumstances of the case, the reassessments for the years 1950-51 to 1956-57, were validly made under Section 34(1)(a) of the Indian Income-tax Act, 1922 ? 2. Whether, on the facts and in the circumstances of the case, the revenue was entitled to contend that reassessments for the years 1954-55, 1955-56 and 1956-57 were validly made under Section 34(1)(b) of the Act ? 3. Whether, on the facts and in the circumstances of the case, the residue out of the excess royalty, i.e., royalty amount paid in excess of the minimum royalty of Rs. 1,50,000 remaining after meeting the income-tax and super-tax liability, of the assessee-company in the assessment years 1950-51 to 1956-57, was a permissible deduction ? 4. Whether, on the facts and in the circumstances of the case, the royalty paid on the polished stones was a permissible deduction in the assessment years 1950-51 to 1960-61 ? 5. Whether an appeal can lie against an order levying penal interest under Section 18A of the Act for the assessment years 1957-58 to 1961-62 ? 6. Whether the assessee-company was entitled to a credit of the amount of excess royalty paid which is held to be in lieu of the income-tax and super-tax liability of the company ?
(3.) WHETHER, on the facts and in the circumstances of the case, the payment of royalty in excess of Rs. 1,50,000 paid under Clause 18 of the lease granted by the Government of His Highness the Maharao Saheb of Kotah on May 2, 1945, which has been held to be in lieu of income-tax, super-tax, etc., by the District Judge, Kotah, is a permissible deduction in the assessment years 1957-58 to 1960-61 ?" 7. We shall now proceed to deal with the aforesaid questions seriatim. Question No. 1. It is well settled that proceedings for reassessment under Section 34 of the Act could be initiated if on account of the omission or failure on the part of the assessee-company to disclose fully and truly all material facts necessary for its assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year or have been underassessed or assessed at too low a rate. Thus, two conditions must be satisfied in order to confer jurisdiction on the ItO to issue notice under Section 34(1)(a) of the Act, namely : (i) the ItO must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment or have been under-assessed or assessed at too low a rate ; and (ii) he must have reason to believe that such non-assessment or under-assessment has been caused by reason of the omission or failure on the part of the assessee-company to disclose fully and truly all material facts necessary for his assessment for that year. Now, in the present case, the assessee-company at the time of original assessments pertaining to the years 1950-51 to 1956-57, which were the subject-matter of reassessment proceedings, claimed that the entire amount paid by it by way of royalty were exempted from payment of income-tax, super-tax or excess profits tax. Even in the suit filed by the assessee-company in the court of the District Judge, Kotah, on December 15, 1953, the case set up by the assessee-company was that in consideration of the stipulations contained in Clause 18 of the agreement, the assessee-company acquired an exemption from the levy, assessment or collection of income-tax, super-tax or excess profits tax. The assessee-company prayed, in the plaint filed by it in the court of the District Judge, Kotah, that it may be declared that during the continuance of the grant dated May 2, 1945, the Union of India was not entitled to recover from the plaintiff, assessee-company, the income-tax, super-tax and excess profits tax. The assessee-company also obtained an interim injunction order dated December 18, 1953, from the District Judge, Kotah, restraining the Union of India and its officers from levying, assessing or collecting income-tax, super-tax or excess profits tax, if any, against the petitioner-company, in respect of its income from the business carried on by it under the grant dated May 2, 1945. It was only on the representation made by the Union of India that the aforesaid interim stay order was later on modified, by the order of the District Judge, Kotah, dated February 18, 1956, to the effect that the assessments for income-tax, super-tax, etc., relating to the assessee-company may be made, but recovery of taxes that may be assessed and demanded for the assessment years 1950-51 and onwards was stayed till the disposal of the suit. Ultimately, the suit filed by the assessee-company was dismissed so far as the Union of India was concerned with the result that the judgment passed by the District Judge, Kotah, on August 23, 1957, had no binding effect, so far as the rights of the Union of India relating to the recovery of income-tax and other taxes from the assessee-company were concerned. ;