2001 (6) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Whether the additional liability for eucalyptus royalty was an unascertained contingent liability and not an allowable deduction.
2. Whether the Tribunal's finding that the additional liability for eucalyptus royalty was contingent or that the assessee adopted a cash system of accounting was based on any material and/or perverse.
3. Whether the additional liability for eucalyptus royalty was neither a statutory liability nor a liability in presenti but a contractual or de futuro liability.

Detailed Analysis:

Issue 1: Contingent Liability
The Tribunal held that the additional liability of Rs. 1,17,20,456 for eucalyptus royalty was an unascertained contingent liability and hence not an allowable deduction. The assessee, a limited company engaged in the manufacture and sale of paper, received a revised royalty rate from the Government of Uttar Pradesh. Initially set at Rs. 90 per V.M.T., it was revised to Rs. 216 and Rs. 290 per V.M.T. and later adjusted to Rs. 145 and Rs. 156 per V.M.T. The assessee disputed this revision via a writ petition, resulting in an interim order to pay Rs. 110 per V.M.T. The Assessing Officer allowed a deduction at this interim rate but disallowed the balance royalty, which amounted to Rs. 1,17,20,456, considering it unascertained and contingent.

Issue 2: Basis of Tribunal's Findings
The Tribunal's finding that the additional liability was contingent or that the assessee adopted a cash system of accounting was challenged. The Tribunal's decision was based on the fact that the liability was disputed in the High Court and not provided for in the accounts. However, the Commissioner of Income-tax (Appeals) accepted the assessee's contention that the non-making of the provision in the books and the pendency of the writ petition did not justify the rejection of the claim. The High Court referenced the Supreme Court's ruling in Kedarnath Jute Mfg. Co. Ltd. v. CIT, which established that a statutory liability could be claimed as a deduction regardless of its entry in the books of accounts or its dispute in court.

Issue 3: Nature of Liability
The Tribunal held that the additional liability for eucalyptus royalty was neither a statutory liability nor a liability in presenti but a contractual or de futuro liability. The High Court, however, found that the royalty was a statutory liability under section 82 of the Indian Forest Act, 1927, and supported by the Supreme Court's decision in India Cement Ltd. v. State of Tamil Nadu, which treated royalty as a tax. The High Court also referenced Madhya Pradesh High Court's ruling in CIT v. Gorelal Dubey, affirming that royalty is a tax and thus a statutory liability. The Court concluded that the royalty liability, being fixed by the government and recoverable as land revenue, could not be considered contractual.

Conclusion:
1. The royalty liability was a certain and statutory liability, not a contingent one.
2. The Tribunal's finding that the liability was contingent and that the assessee adopted a cash system of accounting was perverse.
3. The royalty liability was a statutory liability, not a contractual one.

The High Court answered all questions in favor of the assessee and against the Revenue, thus disposing of the reference accordingly.