The National Steel Works Ltd. Vs.
Commissioner of Income-Tax, Bombay  INSC 193 (3 May 1962)
03/05/1962 DAYAL, RAGHUBAR
DAYAL, RAGHUBAR DAS, S.K.
CITATION: 1966 AIR 1356 1963 SCR (2) 937
Income-tax--Agreement by quota-holder to
supply steel to manufacturer at a certain royalty per ton--Receipt of lump sum
in lieu of royalty--Assessment on amount received--If according to law--Capital
receipt and revenue receipt--Distinction--Indian Income-tax Act, 1922,(11 of
1922),s. 66A (2).
The assessee company was receiving quota of
coal and steel from the Government but had no factory. It entered into a
partnership with a person who had a factory but no quota.
The latter agreed to pay a royalty of Rs. 50
per ton of steel supplied to the firm under the quota. A few years later, that
agreement was modified and the assessee agreed to receive a lump sum of Rs.
60,000 in consideration of waiving the royalty.
938 In assessing the income-tax on the
assessee, the Incometax Officer brought the amount of Rs. 60,000 to tax. When
the matter went to the High Court, that court held that the amount was a
revenue receipt, and hence liable to tax. On appeal to this Court, Held, that
the amount of Rs. 60,000 represented capitalised profits of the assessee
company on account of its transferring or selling the steel which the assessee
company purchased under the authority given by the quota allowed to it. The
assessee company purchased the goods in its own name and delivered them to the
partnership. The sum of Rs.
60,000 represented the capitalised value of
the profits the assessee company was to have on supplying all the steel it had
under the quota at net price. No right to the quota itself was transferred, and
hence it could not be said that the sum of Rs. 60,000 was paid in lieu of the
transfer of the rights in the quota of steel. The description of the amount as
goodwill in consideration of waiving royalty from partnership account did not
convey the real nature of the amount. There was no question of goodwill in
waiving a royalty.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 544 of 1961.
Appeal from the judgment and order dated July
1, 1959, of the Bombay High Court in Incometax Reference No. 58 of 1958.
C.B. Agarwala, A. D. Mathur for K. P. Gupta,
for the appellant.
K.N. Rajagopala Sastri and D Gupta for
1962. May S. The Judgment of the Court was
delivered by J.RAGHUBAR DAYAL, J.-This is an appeal under s. 66 A (2) of the
Indian Income-Tax Act.
The appellant, the National Steel Works Ltd.,
Bombay, a limited liability company, hereinafter referred to as the assessee,
carried on the business of a 'Rolling Mill' prior to the partition of the
country in the territory now in Pakistan. It was a member of the Steel Rolling
Mills Association of.
939 India and as such was receiving a quota
of coal and steel from the Government of India. After the Partition, its
registered office was shifted to Bombay. It had no factory there for carrying
on the business of a rolling mill.
Though possibly not entitled to receive the
quota of coal and steel,. it however continued its membership of the Steel
Rolling Mills Association of India and continued to receive the quota of coal
and steel. In order to utilise the coal and steel so received, it entered into
a partnership with one K. P. Irani who had put a factory in Bombay called the
New Era Iron & Steel Works but had no quota of steel and coal. The
agreement of partnership entered into between Irani and the assessee on
September 29, 1948 provided that the partnership would continue so long as the,
quota system regarding steel continued in the Dominion of India or till the
expiryof the then,' lease of the factory premises, and that the capital of the
firm would be subscribed by the partners in equal shares. Paragraphs 12 and 13
of this agreement are of importance and are quoted below.
"12. In the consideration of Company
taking the said Mr. Irani as partner in the partnership it is agreed that a sum
50/per ton on all steel received by the
partnership from the Company, through the Steel Re-Rolling Mills Association of
India, Calcutta or Iron and Steel Controller, Calcutta shall be paid to the
Company by this partnership calculated every mouth, and after deducting all the
other expense incidental to the business of the partnership the not profit of
the partnership after providing for. outgoings and interest on the current
loans, if any, shall be paid over to the partners in equal shares.
13. All the quota of steel and coal that
Company may receive from the Iron & Steel 940 Controller, the Government of
India and from the Provincial Iron & Steel Controller, Bombay or from the
Steel Re-Rolling Mills Association of India, Calcutta or any such other body
under the quota system that may be in force from time to time for Steel
re-rolling mills of the company at Bombay shall be utilised solely for the
purposes of the business of the part. nersbip who shall pay for the same.
Thereafter, in 1954, the assessee and Irani
entered into an agreement whereby the terms of the agreement of September 29,
1954, were modified. The amendments to clause 12 are important and they are
"IT IS HEREBY AGREED THAT in clause 12
of the Partnership Agreement dated 29.9.48, the Royalty by which is fixed at
Rs. 50/per ton shall be reduced in the manner following from 1st October,
1953." (a) Royalty of Rs. 25/per ton shall be charged from 1/10/53 on all
rollable materials received up to 30,6.54 except semis and perfect billets on
which royalty will be charged at Rs. 1O/per ton on all the said materials
received upto 30/6/54.
(b) That cess charges payable to Steel Re.
Rolling Mills Association of India, Calcutta,
will be paid by the partnership till the partnership exists.
(c) Mr. K. R. Irani hereby agrees to pay a
lump sum of Rs. 60,000./a good-will in consideration of waiving the Royalty
from the partnership Account on the quota. of rerollable scrap materials
received after 30.5.54.
941 (d) Mr. K. R. Irani here agrees that the
said amount of Rs. 60,000/be debited to his capital account in the books of
partnership, bearing interest at 6% per annum from 1st July, 1954.
(e) No Royalty will be charged on any kind of
rollable materials received after 30th June, 1954, by the Company from the
(f) The partnership shall pay to the Company
Rs. 500/per month as office allowance from 1/10153 till the partnership exists.
In assessing the income-tax on the' assessee,
the Income-tax Officer brought the amount of Rs. 60,000/mentioned in subcl. (d)
of amended paragraph 12 of the agreement to tax.
The assessee's appeal to' the Appellate
Assistant Commissioner failed and so did its appeal to the Income-tax Appellate
Tribunal. On an application by the assessee, the Income-tax Appellate Tribunal
stated a case to the High Court for the decision of the question whether the
sum of Rs. 60,000/received by the assessee company from Irani is a revenue
receipt and liable to Income-tax. The High Court decided that it was a revenue
receipt and liable to tax. It is against this order that this appeal has been
filed after obtaining the certificate of fitness from the High Court.
The contention for the appellant is that the
sum of Rs. 60,000/was paid by Irani to the assessee company in view of the
partnership getting the rights under the quota which the assessee company
possessed and that therefore the sum represented a capital receipt and not a
revenue receipt. We do not agree.
It is clear from the facts stated in the
statement of the case that this amount represents capitalised profits of the
assessee company on account 942 of its transferring or selling the steel which
the assessee company purchased, under the authority given by the quota allowed
to it. It is the assessee company which purchases the goods in its own name and
delivers them to the partnership at cost price. Under the original agreement of
1948, the. partnership was to pay to the assessee company Rs. 50/per ton on all
steel it received from the assessee company. Clearly, therefore, the sum of Rs.
50/per ton represented the profit which the assessee company was getting per
ton from the. partnership. Under the terms of the amended agreement, no such
profit was to be paid to the.
assessee company for the steel received from
it after June 30, 1954, and it was to receive Rs. 60,000/in a lump sum.
This amount, therefore, represents the
capitalised value of the profits; the assessee company was to have on supplying
all the steel it receives under its quota at net price. No right, to the quota
itself has been transferred to Irani or the partnership under the agreement and
therefore there could be no basis for considering that this amount of Rs. 60,000/was
paid in lieu of the transfer of rights in the quota of steel to Irani or the partnership.
The description of the amount as goodwill in consideration of waiving royalty
from the partnership account on the quota of rerollable scrap materials
received after June 30, 1954, does not convey the real nature of this amount
and is really an expression which conveys no meaning. There is no question of
goodwill in waiving a royalty.
We are, therefore, of opinion that the High
Court came to a correct conclusion that the sum of Rs. 60,000/was a revenue
receipt and liable to tax. We accordingly dismiss the appeal with costs Appeal